Question
You are a financial advisor at Investo Ltd. Your client would like to explore the possibility of an arbitrage opportunity on a futures contract with
You are a financial advisor at Investo Ltd. Your client would like to explore the possibility of an arbitrage opportunity on a futures contract with the following features:
The futures contract will expire in 9 months.
The underlying asset is a share with a price of R60.
The share is a non-dividend paying stock.
The risk-free interest rate per month is 0.90%.
The intrinsic or fair value of the futures is estimated to be R65,04.
Assume that the actual futures price available in the market is R64.
Required:
2.1. Ignoring transaction and other costs, detail the appropriate arbitrage strategy for both cases. (11 marks)
2.2. Discuss any two differences between futures and forwards contracts. (4 marks)
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