On separate sheets of paper, please provide discussion and your supporting calculations to answer the word problems below.All work is to be done individually, and full credit can only be awarded if all calculation work is fully shown in solutions.

1.With Greece's bailout strategy & timing still in doubt,

foreign exchange markets are roiling and over-reacting

veritably each and every day.As assistant currency arb

trader for CountriCorp, you notice the following "spot

vs. futures" FX imbalance pop up on Countri's trading screens market-open on Monday morning early March '18:

Spot Japanese Yen ( per $) 76.785

July 2018 Yen Futures .011809

(LIFFE delivers 12.5M in 124 days)

'overnight' term repo rate1.07%

(annually-stated)

Countricorp has ongoing stockpiles of spot yen, whereby

you've pre-approved access for (up to) 100 million yen

of internal 'drawdown' (borrowing) for arbitrage trading

and profit-taking purposes. In addition to availability

of physical FX for buying/selling (and short-selling as

needed), Countri owns LIFFE seats and full access to the

repurchase agreement market at term rates quoted above.

a. Using prices reported above, identify & explain whether

or not this(by definition) is a 'normal' futures market.

Use your evaluation of price differences(basis) and any

price trends to support your claims. As a result of your

assessment, would forward or reverse C&C be profitable?

(no calculations needed, but FULLY DESCRIBE conditions)

b. Disregarding all market frictions (such as transactions

costs, short sale proceeds restrictions, or any other

expenses and limitations/hindrances to storage and

delivery); clearly outline and explain all necessary

trades, resulting costs, revenues and profits for a

SIX(6) contract arbitrage of the strategy you proposed

In part (a).Be explicit and complete in describing all

Arb steps, particularly with the unwinding process.

SHOW ALL WORK in determining this "academic" arb ?.

(over for parts c and d)

MGF407, Spring 2018, HW #2 (cost of carry pricing), cont'd.

c. Now considering any and all relevant arbitrage costs,

calculate what profits are actually available to your

firm net of 'frictions' and other restrictions. Suppose

Countricorp faces .39% commissions on traded futures

contracts, a 1.68% spot market transactions cost, as

well as an .3 per yen per month storage and delivery

charge. Also, 20% of short sale proceeds are restricted.

What's 'economic' arb profit? SHOW INTERMEDIATE #'s!

d. Using the Cost of Carry pricing equation (including the

market frictions), determine the yen futures price 'at

full carry'. What will happen to the size of the basis?