Assume tFT2 = tFT1 (1 + T1rT2) + T1CT2 is the equilibrium situation.

Also assume that T2 T1 is one year, that T1CT2 = $1 and that T1rT2 = 10%.

Assume the initial prices are tFoT1 = 100 & tFoT2 = 133.

This is not an equilibrium situation.

Say the next day, t + 1, the t+1FT1 price adjusts to 115.

1. What would be the equilibrium price for t+1FT2?

   • 127.5

   • 122

   • 112

   • None of these represent an equilibrium price for t+1FT2

A trader goes long the FT1 contract and short the FT2 contract believing these are not equilibrium prices and that he will profit when they adjust to equilibrium.

Say the next day, t + 1, the t+1FT1 price moves to 115 and t+1FT2 adjusts to an equilibrium price.

2. If the trader round trips his positions on day t+1, what is his profit or loss on the FT2 position?

   • Profit 5.5

   • Cannot be determined

   • Profit 11

   • Loss of 11