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PROBLEM 2. Spot price of gasoline is $1.6846/gal. The total interest rate on four-month loans and deposits is 0.96% (i.e. $100 borrowed today would require
PROBLEM 2. Spot price of gasoline is $1.6846/gal. The total interest rate on four-month loans and deposits is 0.96% (i.e. $100 borrowed today would require a payment of $100.96 in four months). a. Assuming no storage cost and no transaction cost, determine the no-arbitrage price for a gasoline futures contract maturing four months from now. b. Suppose that the four-month gasoline futures contract is actually traded at $1.6952/gal. Determine if an arbitrage opportunity is present. If so, describe a trading strategy that takes advantage of this arbitrage opportunity and calculate the profit of the strategy per contract. Make sure to clearly identify what position should be taken in the futures contract, whether the asset should be bought or sold, and how much cash will have to be borrowed or invested. The contract size is 42,000 gal. Note. Round all results to four decimal places
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