Assume that we are further into the economic recovery and Treasury Securities with 10 years to mature and annual coupon payments = 4% of face value are selling today at their face value in the spot market. Assume that the price of a 3 month futures contract based on a $100,000 Face Value 10 year T-note with a 4% coupon is $100,000. Finally, assume that it is possible for well-collateralized institutions to either borrow or lend money for 3 months at a periodic interest rate of .5%.

a) Is there an opportunity for risk free arbitrage here? If so, explain in detail what you would do to exploit it. If not, explain why not. You may ignore transactions costs such as brokers* fees.

b) What would your arbitrage profit per contract be as long as the purchases and sales you used to set up your arbitrage position did not change futures price or underlying T-Note price? .

c) Why would the futures price and underlying price in the T-Note and T-Note Futures market not remain at their current levels?