Question $5$ Futures Arbitrage $(15$ marks$)$

You are a financial advisor at Festo Ltd$.$ Your client would like to explore the possibility of an

arbitrage opportunity on the following futures contract. The futures contract will expire in $9$

months. The underlying asset is a non$-$dividend paying share that is currently trading at a price

of R$120$ per share. The risk$-$free interest rate per month is $0\mathrm{.}67\%.$ The current futures price is

R$125,$ however, the intrinsic or fair value of the futures is estimated to be R$127\mathrm{.}43.$

Required:

$5\mathrm{.}1.$ Ignoring transaction and other costs, detail the appropriate arbitrage strategy. $(11$ marks$)$

$5\mathrm{.}2.$ Discuss any two differences between futures and forwards contracts. $(4$ marks$)$