It is December now. A March futures contract on 10,000 MMBtu of natural gas settled for $4.95 per MMBtu. Assume that the contract has exactly 3 months (0.25 years) to maturity. The spot price is $4.78. Present value of three months worth of storage costs is $.05 per MMBtu. The interest rate is 3% annually. Assume convenience yield to be zero. Use continuous compounding.

1. Using the formula for commodity futures parity, F = {S + PV(c)}*e^rT, establish that an arbitrage opportunity exists.

2. Design the arbitrage strategy. Show profit for 10,000 MMBtu, i.e. per one futures contract.