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. Prove that tFT 2 tFT 1 ( 1 + T 1 rT 2 ) + T 1 CT 2 using a pure arbitrage argument
Prove that tFT tFT TrT TCT using a pure arbitrage argument where t is today, T and T are maturity dates and t T T Ignore markingtothemarket. a What are some reasons that in reality this is not a pure arbitrage? b How important an effect might these have on the arbitrage profit? c Can you think of any way to get around these problems? Suppose a trader observes the following prices on June : t Futures price of gold for September delivery T is $oz Futures price of gold for December delivery T is $oz The borrowing and lending rate is per annum and TCT is $ payable on What is the arbitrage profit? Assume that tFT tFT TrT TCT Also assume that T T is one year, TCT $ and TrTl A Are the following equilibrium prices? tFT tFT If not, what is the arbitrage profit established at time t from positions held till maturity? B Say prices adjust the next day t where t l T where tFT can assume the following possible values: a tFT b tFT c tFT i What would be the equilibrium prices for tFT in each of these cases? ii What are the resulting profits obtained if you round trip the positions taken in A for each of these equilibrium cases? iii What happened to the arbitrage profit lockedin in part i Is it lost since the market is now in equilibrium or can it be regained iv Say on day tl the following prices were observed: tFT tFT What would you do Can you explain step by step with calculations so I can better understand these concepts and study from this?
Prove that tFT tFT TrT TCT using a pure arbitrage argument
where t is today, T and T are maturity dates and t T T
Ignore markingtothemarket.
a What are some reasons that in reality this is not a pure arbitrage?
b How important an effect might these have on the arbitrage profit?
c Can you think of any way to get around these problems?
Suppose a trader observes the following prices on June : t
Futures price of gold for September delivery T is $oz
Futures price of gold for December delivery T is $oz
The borrowing and lending rate is per annum and TCT is $ payable on
What is the arbitrage profit?
Assume that tFT tFT TrT TCT
Also assume that T T is one year, TCT $ and TrTl
A Are the following equilibrium prices? tFT tFT
If not, what is the arbitrage profit established at time t from positions held till maturity?
B Say prices adjust the next day t where t l T where tFT can assume the following
possible values:
a tFT
b tFT
c tFT
i What would be the equilibrium prices for tFT in each of these cases?
ii What are the resulting profits obtained if you round trip the positions taken in A for
each of these equilibrium cases?
iii What happened to the arbitrage profit lockedin in part i
Is it lost since the market is now in equilibrium or can it be regained
iv Say on day tl the following prices were observed: tFT tFT
What would you do
Can you explain step by step with calculations so I can better understand these concepts and study from this?
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