Question
Assume that there is a 6-month Treasury bill futures contract in existence. Assume that it is priced to yield 8% (BEY). Assume the face value
Assume that there is a 6-month Treasury bill futures contract in existence. Assume that it is priced to yield 8% (BEY). Assume the face value of the contract is $100,000.
Assume that the 6 month spot rate is 7.4% and the 1 year spot rate is 7.6%
(3 pts) a. Based on the above rates, what should the BEY and PRICE of the 6-month Treasury bill futures contract be?
(12 pts) b. Show that this futures price is incorrect using a zero-cost investment strategy involving the spot market and the futures market in a way that MAKES A PROFIT. (Of course, if the futures price were correct, this zero cost strategy will also have zero profit.) Show all the trades you made at time 0 (including the actual dollar cash flows) and at the expiration of the futures contract.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started