Today is period 0, and the length between the periods is one year. Consider the following four securities: Security A is a constant coupon bond with annual coupon of $100.00 and a face value of $1,000.00. The next coupon will be paid in 1 year from today. The bond matures on period 4. Security A can be bought or issued at a price of $998.20 per unit, assuming a seven day settlement period. Security B is a forward contract. The contract matures on period 2, and the forward price is $8,203.24. The security underlying the forward contract matures on period 4 with a face value of $10,000.00. You may go long or short this contract. Security C is an annuity. It pays $1.00 on periods 1, 2, 3, and 4. Security C can be bought or issued at a price of $3.1762 per unit, assuming a seven day settlement period. Security D is a zero coupon bond. It matures on period 2, and it has a face value of $4,101.62. Security D can be bought or issued at a price of $3,404.15 per unit, assuming a seven day settlement period. Based on these numbers, the forward contract is not correctly priced. Formulate an arbitrage strategy where you generate a profit of $2.50 in seven days. Be sure you provide a clear explanation as to the number of units of the above securities you would use to achieve this profit. Also be sure to indicate whether the position in a Chapter 9: Forward Contracts, Questions Page 453 Adventures in Debentures given security above involves a long or short position to achieve the arbitrage profit. Today is period 0, and the length between the periods is one year. Consider the following four securities: Security A is a constant coupon bond with annual coupon of $100.00 and a face value of $1,000.00. The next coupon will be paid in 1 year from today. The bond matures on period 4. Security A can be bought or issued at a price of $998.20 per unit, assuming a seven day settlement period. Security B is a forward contract. The contract matures on period 2, and the forward price is $8,203.24. The security underlying the forward contract matures on period 4 with a face value of $10,000.00. You may go long or short this contract. Security C is an annuity. It pays $1.00 on periods 1, 2, 3, and 4. Security C can be bought or issued at a price of $3.1762 per unit, assuming a seven day settlement period. Security D is a zero coupon bond. It matures on period 2, and it has a face value of $4,101.62. Security D can be bought or issued at a price of $3,404.15 per unit, assuming a seven day settlement period. Based on these numbers, the forward contract is not correctly priced. Formulate an arbitrage strategy where you generate a profit of $2.50 in seven days. Be sure you provide a clear explanation as to the number of units of the above securities you would use to achieve this profit. Also be sure to indicate whether the position in a Chapter 9: Forward Contracts, Questions Page 453 Adventures in Debentures given security above involves a long or short position to achieve the arbitrage profit
