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    Formulate Arbitrage Strategy to Profit Situations

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    24. The following prices are observed. Formulate an arbitrage strategy to profit from the

    ? Interest rate is 7.25% compounded daily, for 270-day T-bills in the spot market.
    ? Interest rate is 7.00% compounded daily, for 90-day T-bills in the spot market.
    ? The futures rate is 7.50% for T-bills with 180 days to maturity, to be delivered 90 days from now.

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    Solution Preview

    24. In this problem, there are two ways to invest for a 270-day period. One way is to buy 270-day bills, which yields 7.25%. The other is to buy 90-day bills ...

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