+1-316-444-1378

A futures contract on a T-bill expires in 30 days. The T-bill matures in 120 days. The discount rates on T-bills are as follows:

30-day bill:

5.4 percent

120-day bill:

5.0 percent

A. Find the appropriate futures price by using the prices of the 30- and 120-day T-bills.

B. Find the futures price in terms of the underlying spot price compounded at the appropriate risk-free rate.

C. Convert the futures price to the implied discount rate on the futures.

D. Now assume that the futures is trading in the market at an implied discount rate 20 basis points lower than is appropriate given the pricing model and
the rule of no arbitrage. Demonstrate how an arbitrage transaction could be executed.

E. Now assume that the futures is trading in the market at an implied discount rate 20 basis points higher than is appropriate given the pricing model and
the rule of no arbitrage. Demonstrate how an arbitrage transaction could be executed.

Categories: Uncategorized

0 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *