The current price of silver is $21.76 per ounce. Assume that the storage cost is zero. The 3-month interest rate is 1.51% per annum (with continuous compounding). A CME silver futures contract is current trading at $21.6 (per ounce) will mature in three months. The size of the contract is 5,000 ounces. Ignoring bid-ask spread and transaction costs, identify the arbitrage opportunity and show how you can capture it (and have net cash inflow today).

a) Determine the fair 3-month futures price. (2 marks)

Question 15

b) Is the futures overpriced or underpriced relative to its fair value? (2 marks)

Select one:

a.Underpriced

b.Overpriced

Question 16

c) Select the related transactions of arbitrage (Trade just one contract) (3 marks) (multiple selections are allowed)

Select one or more:

a.

Buy silver future @ $21.6

b.

Borrow $108,800 for 3 months and repay $109,211.50 after 3 months

c.

Sell silver future @ $21.6

d.

Buy 5,000 ounces of Silver @ spot price $21.76

e.

Sell 5,000 ounces of Silver @ spot price $21.76

f.

Deposit $108,800 in bank for 3 months and collect interest and principle of $109,211.50 at the end of the period

Question 17

d) how much arbitrage profit can you lock in per future contract? (ignore transaction cost) (2marks)