ZuoTi.Pro
Question

Recall that the delivery period for a commodity futures is the period of time the seller...

Recall that the delivery period for a commodity futures is the period of time the seller of the contract has to deliver the underlying asset to the buyer. 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.

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

If the futures price is greater than the spot price during the delivery period, an arbitrageur can make arbitrage profit by buying the asset, shorting a futures contract, and making 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 delivery will be made is made by the party with the short position. Nevertheless companies interested in acquiring the asset will find it attractive to enter into a long futures contract and wait for delivery to be made.

Please do rate me and mention doubts in the comments section.

0 0
Add a comment
Know the answer?
Add Answer to:
Recall that the delivery period for a commodity futures is the period of time the seller...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • 4. Sun Board of Trade offers futures contract on Nyakato, Inc. Assume risk free interest rate...

    4. Sun Board of Trade offers futures contract on Nyakato, Inc. Assume risk free interest rate is 0.25% per month and Nakato stock sells for $450 per share (a) Find the predicted futures price (on Nyakato) for delivery in 3 months. (5) (b) If the futures price on Nyakato stock in the market is $455.00, is the spot-futures parity relationship violated? If yes, show the strategy and the cash flows at time 0 and at time T (maturity) that can...

  • 27. The writer (seller) of a put option a. agrees to sell shares at a set...

    27. The writer (seller) of a put option a. agrees to sell shares at a set price if the option holder desires b. agrees to buy shares at a set price if the option holder desires c. has the right to buy shares at a set price d. has the right to spl shares at a set price 17. A call option is said to be "in-the-money" if a. the stock price (i.e. the underlying asset) is greater than the...

  • He no ar 7 compound 13. As inventories of a commodity decline, which of the following...

    He no ar 7 compound 13. As inventories of a commodity decline, which of the following is true? A. The one-year futures price as a percentage of the spot price increases The one-year futures price as a percentage of the spot price decreases The one-year futures price as a percentage of the spot price stays the same Any of the above can happen C. D. 14. Which of the following is true for a consumption commodity? There is no limit...

  • The current gold price for immediate delivery (i.e., gold spot price) is $1440 (bid) and $1450...

    The current gold price for immediate delivery (i.e., gold spot price) is $1440 (bid) and $1450 (ask) per ounce. A one-year forward contract of gold trades at a forward price of $1500 (bid) and $1510 (ask) per ounce. In a long forward contract you will receive delivery of one ounce of gold in one year and you will need to pay $1510 at the time of delivery. Alternatively, in a short forward position you will need to deliver one ounce...

  • A Swap Contract: Assume that we are in a one-period arbitrage–free market with a a riskless...

    A Swap Contract: Assume that we are in a one-period arbitrage–free market with a a riskless asset (called MoneyMarket). Assume that all prices are given in units of MoneyMarket. Consider a swap contract that calls for the following: (a) The buyer pays the seller an amount q to enter into the contract at time 0. (b) The seller agrees to exchange 1 unit of asset A for 1 unit of asset B at time 1. TheunitvaluesofassetsAandBattimest=0andt=1areAt andBt,respectively. Asinall such problems,...

  • Micro E-mini S&P 500 Futures contract

    You have \(\$ 100,000\) to invest today. You are bullish about the stock market and you think that the S\&P 500 index is going up. You want to leverage your investment by taking a long position in S\&P 500 index futures.Micro E-mini S\&P 500 Futures contractThere is a new futures contract on the S\&P 500 index with a lower contract multiplier-only 5 times the index. You are using this contract to implement your strategy. You chose the contract expiring on...

  • 9. What is the most commonly used method to s e most commonly used method to...

    9. What is the most commonly used method to s e most commonly used method to settle a futures contract? A) The futures contract buyer delivery of the underlying asset. B) The futures contract seller usu contract buyer usually holds the contract to the maturity date and takes the es contract seller usually holds the contract to the maturity date and makes me delivery of the underlying asset to the counterpart. utures contract traders usually offset their initial futures positions...

  • how to calculate the answer 8? COMMODITY DERIVATIVES - Practice Problems one Raffi Musicale is the...

    how to calculate the answer 8? COMMODITY DERIVATIVES - Practice Problems one Raffi Musicale is the portfolio manager for a defined benefit pension plan. He meets with Brown market strategist with Menlo Bank to discuss possible investment opportunities. The investment committee for the pension plan has recently approved expanding the plan's permitted asset mix to include alternative asset classes Brown proposes the Apex Commodity Fund (Apex Fund) offered by Menlo Bank as a potential suitable investment for the pension plan....

  • 1. Consider the futures contract to buy/sell December gold for $500 per ounce on the New...

    1. Consider the futures contract to buy/sell December gold for $500 per ounce on the New York Commodity Exchange (CMX). The contract size is 100 ounces. The initial margin is S3,000, and the maintenance margin is $1,500. 1.a. Suppose that you enter into a long futures contract to buy December for $500 per ounce on the CMX What change in the futures price will lead to a margin call? If you enter a short futures contract, what futures price will...

  • 1. Consider a model with only one time period. Assume that there exist a stock and...

    1. Consider a model with only one time period. Assume that there exist a stock and a cash bond in the model. The initial price of the stock is $40. The investor believes that with probability 1/5 the stock price will drop to $20 and with probability 4/5 the stock price will rise to $80 at the end of the time period. The cash bond has an initial price of $100 and it will with certainty deliver $110 at the...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT