Factors Affecting The Price Of Trading Futures

1004 Words5 Pages
Arbitrage takes advantage of differences in the prices so as to make profits that are risk-free. Therefore, financial markets use these standard tools when the business is in the right environment. It helps to predict how the law of one price is used to take advantages of the gains of trading futures. In this example, all the calculations will be used to show the benefits of arbitrage. The study will assume a starting capital of $100,000 with an interest rate of about 5 percent. Also, the study had USD 25 per contract transaction fee within a time frame of one year (366 days). The initials steps of the research deal with the calculation of the recorded future and the spot commodity prices in that period. The spot price was the price at…show more content…
After calculating the future prices, the next stride was to determine arbitrage and if we could take advantage of it. It was achieved by spot and future parity calculation. The above calculation used the assumption that law of one price such as that of goods sold in one country is equal to another country. Therefore, the F calculated measures the commodities future price and it is very different from spot price in a contract C using the cost holding money of an asset. Therefore, there is a difference between the three rates namely F (Future price), the purchase price, and the opportunity for arbitrage. We calculated the future prices using the formula = S erT = 1341.5*e^5 %*( 580/366) = USD 1500.4 Since from the calculations, there is a difference between the future price and the future spot parity it is an indication that there is an arbitrage opportunity for the future prices of the gold. Thus, the table above is a presentation of what can be done to take care of the arbitrage opportunity. Table2. Advantage of arbitrage opportunities Indicator Unit Cash Flow when t=1 Cash Flow when t=2 Spot = 1500 Spot = 1200 Long Futures USD 0,0 209,0 -154,3 Short spot USD 1 411,9 -1100,1 -900,0
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