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?© BrainMass Inc. brainmass.com December 20, 2018, 6:17 am ad1c9bdddf
Please find tutorial and help for Bond futures cash&carry arbitrage in the attached file.
Running Head: FINANCE
Bond Futures Cash & Carry Arbitrage
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 -
Futures settlement cash flows:
Price received for bond (future contract price)
Bond accrued (9% coupon rate for four months)
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)
Total outplay $100.4
Arbitrage profit (Total ...
Bond futures cash&carry arbitrage is assessed.