Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Why cant I short sell from the spot right now and buy using a long futures and make a profit here when the futures price

Why cant I short sell from the spot right now and buy using a long futures and make a profit here when the futures price is less than the spot price

image text in transcribed Show that, if the futures price of a commodity is greater than the spot price during the delivery period, then there is an arbitrage opportunity. Does an arbitrage opportunity exist if the futures price is less than the spot price? Explain your answer. Ans 12) If the futures price is greater than the spot price during the delivery period, an arbitrageur buys the asset, shorts a futures contract, and makes delivery for an immediate profit. If the futures price is less than the spot price during the delivery period, there is no similar perfect arbitrage strategy. An arbitrageur can take a long futures position but cannot force immediate delivery of the asset. The decision on when the delivery will occur is made by the party with the short position. Nevertheless, companies interested in acquiring the asset may find it attractive to enter a long futures contract and wait for delivery to be made

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Numerical Methods In Finance

Authors: René Carmona, Pierre Del Moral, Peng Hu, Nadia Oudjane

2012th Edition

ISBN: 3642257453, 978-3642257452

More Books

Students also viewed these Finance questions