# cash&carry arbitrage

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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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.