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    cash&carry arbitrage

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    Suppose that the price of a bond futures contract that settles in four months is $101 and the price of the underlying bond is $98. The underlying bond has a coupon rate of 9%, par value of $100, and the next coupon payment is to be made in six months. The borrowing rate is 7.2%. If an investor implemented a cash and carry trade, what would the arbitrage profit be?

    Now suppose that instead of a futures price of $101, the futures price is $96. If an investor implemented a reverse cash and carry trade, what would the arbitrage profit be?

    What is the theoretical futures price?

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    Solution Preview

    Hello

    Please find tutorial and help for Bond futures cash&carry arbitrage in the attached file.

    Running Head: FINANCE

    Bond Futures Cash & Carry Arbitrage

    Answer.
    Arbitrage Profit with Cash and Carry Trade
    Future price of future contract (F) = $101 (settle in four month)
    Price of underlying bond (P) = $98
    Coupon rate = 9%
    Par value = $100
    Borrowing rate (r) = 7.2%
    Time of future contract delivery (t) = 4 months
    The cash and carry trade can be used to calculate the arbitrage profit that is as below -
    Particular Amount
    Futures settlement cash flows:
    Price received for bond (future contract price)
    Bond accrued (9% coupon rate for four months)
    $101
    $3
    Total proceeds from future contract $104
    Loan cash flows:
    Repayment of principal (underlying price of bond)
    Interest on borrowing (7.2% borrowing rate for four months)
    $98
    $2.4
    Total outplay $100.4
    Arbitrage profit (Total ...

    Solution Summary

    Bond futures cash&carry arbitrage is assessed.

    $2.19