Topic: Cost of Carry, Valuation and Arbitrage

Using market information as of the close of Tuesday, August 29 (see CMEGROUP.com and WSJ online or hard copy for closing price info), address the following questions regarding the Platinum futures contract, which is listed on the CME Group futures exchange.

Assumptions: Assume the Platinum, Engelhard industrial bullion" price is a reasonable proxy for the spot (cash) price. To find this price, go to wsj.com, click on Markets then on Market Data. Next, click on Commodities & Futures and click again on Cash Commodity Prices which is listed under Spot Prices. For futures prices, keep looking for Futures Settlements under Settlement Prices, Indexes & Other Statistics (or go to cmegroup.com and look under metals). The maturity date of this futures is the 3rd last business day of the maturity month. To get your relevant financing rate (for borrowing or lending), see Money Rates under Bonds, Rates & Credit Markets and use London Interbank Offered Rates (Libor). (You can also get Libor spot rates at global-rates.com). Of the various Libor maturities reported (e.g., 1, 3, 6, or 12 months) use the one with a term most closely matching that of the futures maturity date, but when computing the financing cost please be sure to use an actual day count and a 360-day year (e.g., use Actual/360 convention). Also, assume warehousing and delivery costs are negligible and ignore for now convenience yields and leasing opportunities.

Questions:

(A) Determine the theoretical futures price ($ per ounce) for the January 2018 Platinum futures contract using procedures discussed in class. (Hint: the 3-month Libor probably is the closest in maturity.)

(B) i) Compare the actual reported futures price to your answer in (A); and ii) If the actual and theoretical futures prices differ, explicitly detail the steps for conducting an arbitrage and compute the potential arbitrage profit (per ounce) using methods presented in class.

(C) Discuss several factors that have not been accounted for that could potentially explain how an "apparent" arbitrage opportunity may have arisen in part B.

Sources: SiX Financial Information, WSJ Market Data Group, historcal data prior to 6/15/12 Thomson Reuters WSJ Market Dara Group Platinum (NYM)-50 troy oz.: $ per troy oz. LIFETIME ( ) Open Int Low 892.20 193.00 891.40 695.00 Open High Low Settle Chg High 142 1000 70 Aua 17 Sep 17 965.30 1006.90991 20 962.60 991.20 992.801011.50 991001003.5014201045.90 997.50 1004.40 962.60 1000.70 1002.10+14.20 100690 Oct 17 Jan 18 Aor 18 Est vol 23,733: vol na na; open int 73,770 na. 53,355 9020 1104 1013 20 995.30 1006.4014 00 1031 30 906.50 1015.30 999001010.7013 BO1015.30A Sueces SX Friancal letormation, W53 Market Data Group; historical data prior to 615/11 Thonmson Resers; WSJ Market Data Group Sources: SiX Financial Information, WSJ Market Data Group, historcal data prior to 6/15/12 Thomson Reuters WSJ Market Dara Group Platinum (NYM)-50 troy oz.: $ per troy oz. LIFETIME ( ) Open Int Low 892.20 193.00 891.40 695.00 Open High Low Settle Chg High 142 1000 70 Aua 17 Sep 17 965.30 1006.90991 20 962.60 991.20 992.801011.50 991001003.5014201045.90 997.50 1004.40 962.60 1000.70 1002.10+14.20 100690 Oct 17 Jan 18 Aor 18 Est vol 23,733: vol na na; open int 73,770 na. 53,355 9020 1104 1013 20 995.30 1006.4014 00 1031 30 906.50 1015.30 999001010.7013 BO1015.30A Sueces SX Friancal letormation, W53 Market Data Group; historical data prior to 615/11 Thonmson Resers; WSJ Market Data Group