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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
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 R120 per share. The risk-free interest rate per month is 0.67%. The current futures price is R125, however, the intrinsic or fair value of the futures is estimated to be R127.43. Required: 5.1. Ignoring transaction and other costs, detail the appropriate arbitrage strategy. (11 marks) 5.2. Discuss any two differences between futures and forwards contracts. (4
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