Please focus on question c. Please show all work. Consider a 1-year futures cont
ID: 2823514 • Letter: P
Question
Please focus on question c. Please show all work.
Consider a 1-year futures contract on an investment asset that provides no income. It costs $2 per unit to store the asset, with the payment being made at the beginning of the year. Assume that the spot price is $400 per unit and the risk free rate is 10% per annum for all maturitiesb) If currently the bid and ask on this 1-year futures contract are $444.5 and S445 respectively, what will you do? Please be specific and describe what this would imply? c) If this asset provides a lump sunm income distribution mid year that was S50, what would happen. (This is the important queston, please focus on this question. S 1SExplanation / Answer
Remember add cost to and subtract income from spot price
Expected future spot price = (400 + 2)*exp(0.10*1) = 444.28
You can sell at $444.5 to the dealer and buy from dealer at $445
Borrow and Buy in spot market and sell at higher price at $444.5
Profit at (t=1) = 444.50 - 444.28 = $0.32
If there $50 income in mid-year
Expected future spot price = (400 + 2)*exp(0.10*1) - 50*exp(0.10*0.5) = 391.72
Similarly, profit = 444.50 - 391.72 = $52.78