For a silver futures contract that matures one year from now, the futures price today is $21 per oz.Suppose storage costs are 1% per year and income is 0%, and the riskfree rate is 4% per year.

(a) (4 points) What is the current spot price per oz. if there are no arbitrage opportunities?

(b) (7 points) Construct an arbitrage strategy if the spot price is $3 lower than your answer in part (a).Outline the transactions in your strategy, and calculate the cashflow today and the cashflow in a year (ignore margin requirements).Show your calculations.

(3) (Total: 10 points)

Suppose the Capital Asset Pricing Model (CAPM) holds.The market premium is 8% and the standard deviation of the market portfolio is 20%.Stock A has a beta of 2 and Stock B has a beta of 1.The riskfree rate is 2%.

(a) (2 points) Calculate the expected returns of Stock A and Stock B.

(b) (4 points) Do we have enough information to calculate the correlation between Stock A and Stock B?Briefly explain.

(c) (4 points) Do we have enough information to calculate the correlation between A and B, if they are well-diversified portfolios (i.e., diversifiable risk is negligible) instead of stocks?Briefly explain.