Calculate the total cash flow in strategy at different time intervals and as per the given information. Introduction: An arbitrage strategy is given, first future contract price F ( T 1 ) at a time period of T 1 , now consider the next time period T 2 with future price F ( T 2 ) .

Question

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Answer 1

Question

Chapter 22, Problem 19PS

A

Summary Introduction

To explain: Calculate the total cash flow in strategy at different time intervals and as per the given information.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

A

Expert Solution

Answer to Problem 19PS

Thus the final cash after T2 years will be F(T2)−F(T1)×(1+rf)(T2−T1) .

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

There are two future prices with definite time period, initially the cash was zero, after one year it will be P1−F(T1) and after two year it will be zero again. Short selling of future contract after two year will be F(T2)−P2 . Number of assets at T1 will be - P1 and sell asset will be + P2 . Now to borrow future price at T1 will be F(T1) and at T2 will be −F(T1)×(1+rf)T2−T1 . Now the final cash flow after T2 years will be F(T2)−F(T1)×(1+rf)(T2−T1) .

B

Summary Introduction

To explain: If arbitrage opportunity is none then why profit will be zero at time T2 .

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

B

Expert Solution

Answer to Problem 19PS

Thus investment at this period is zero and also it is risk free. Hence the total profit also is null when there is no arbitrage opportunity.

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

In the absence of the arbitrage opportunity the profit will be zero because investment in time T2 is risk free and net investment is also zero in this time period. Hence the profit will also be zero at this condition.

C

Summary Introduction

To explain: Establish the relation between F(T1) and F(T2) for the profit at T2 to be equal to zero.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

C

Expert Solution

Answer to Problem 19PS

Hence relation between F(T1) and F(T2) is given by this equation F(T2)=F(T1)×(1+rf)(T2−T1) .

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

At last stage for profit should be zero at time T2 , the below relation should be followed by T1 and T2

F(T2)=F(T1)×(1+rf)(T2−T1)

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Students have asked these similar questions

Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract? a. Forward contracts can be tailored, while future contracts are non-standardized. b. Forward contracts are classified as exotic derivatives. c. Futures contracts are exchange-traded contracts, daily settlements are implemented by the clearing house. d. More flexibility as the buyer can decide whether or not to exercise the contract at maturity. e. For futures contracts, all cash flows are required to be paid at one time on contract maturity.

Consider the following two scenarios whereby the cost-of-carry model is violated. You are required to select appropriate missing words and fill in question 1. a. long b. spot c. over priced d. short arbitrage e. under priced f. long arbitrage g. futures h. short Question 1 a. If ft >S0 (1 + rf - d)^t, then the( ) is ( )relative to ( ) or equivalently, the quoted futures price is higher than what it should be. Thus, the correct arbitrage strategy should be: ( ) the futures contract and ( )the spot market. This strategy is also known as ( ). b. If ft <S0 (1 + rf - d)^t, then the( ) is ( )relative to ( ) or equivalently, the quoted futures price is lower than what it should be. Thus, the correct arbitrage strategy should be: ( ) the futures contract and ( )the spot market. This strategy is also known as ( ).

At time t = 0, a trader takes a long position in a futures contract on stock i that willexpire at time T. the present value of this contract to the long is given by: See Image.Assume no-arbitrage pricing. Show analytically that if the return from stock i is positively correlated with the overall return on the stock market, then the futures market must be in backwardation at time t = 0.

Answer 2

Question

Chapter 22, Problem 19PS

A

Summary Introduction

To explain: Calculate the total cash flow in strategy at different time intervals and as per the given information.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

A

Expert Solution

Answer to Problem 19PS

Thus the final cash after T2 years will be F(T2)−F(T1)×(1+rf)(T2−T1) .

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

There are two future prices with definite time period, initially the cash was zero, after one year it will be P1−F(T1) and after two year it will be zero again. Short selling of future contract after two year will be F(T2)−P2 . Number of assets at T1 will be - P1 and sell asset will be + P2 . Now to borrow future price at T1 will be F(T1) and at T2 will be −F(T1)×(1+rf)T2−T1 . Now the final cash flow after T2 years will be F(T2)−F(T1)×(1+rf)(T2−T1) .

B

Summary Introduction

To explain: If arbitrage opportunity is none then why profit will be zero at time T2 .

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

B

Expert Solution

Answer to Problem 19PS

Thus investment at this period is zero and also it is risk free. Hence the total profit also is null when there is no arbitrage opportunity.

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

In the absence of the arbitrage opportunity the profit will be zero because investment in time T2 is risk free and net investment is also zero in this time period. Hence the profit will also be zero at this condition.

C

Summary Introduction

To explain: Establish the relation between F(T1) and F(T2) for the profit at T2 to be equal to zero.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

C

Expert Solution

Answer to Problem 19PS

Hence relation between F(T1) and F(T2) is given by this equation F(T2)=F(T1)×(1+rf)(T2−T1) .

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

At last stage for profit should be zero at time T2 , the below relation should be followed by T1 and T2

F(T2)=F(T1)×(1+rf)(T2−T1)

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Answer 3

Question

Chapter 22, Problem 19PS

A

Summary Introduction

To explain: Calculate the total cash flow in strategy at different time intervals and as per the given information.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

A

Expert Solution

Answer to Problem 19PS

Thus the final cash after T2 years will be F(T2)−F(T1)×(1+rf)(T2−T1) .

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

There are two future prices with definite time period, initially the cash was zero, after one year it will be P1−F(T1) and after two year it will be zero again. Short selling of future contract after two year will be F(T2)−P2 . Number of assets at T1 will be - P1 and sell asset will be + P2 . Now to borrow future price at T1 will be F(T1) and at T2 will be −F(T1)×(1+rf)T2−T1 . Now the final cash flow after T2 years will be F(T2)−F(T1)×(1+rf)(T2−T1) .

B

Summary Introduction

To explain: If arbitrage opportunity is none then why profit will be zero at time T2 .

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

B

Expert Solution

Answer to Problem 19PS

Thus investment at this period is zero and also it is risk free. Hence the total profit also is null when there is no arbitrage opportunity.

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

In the absence of the arbitrage opportunity the profit will be zero because investment in time T2 is risk free and net investment is also zero in this time period. Hence the profit will also be zero at this condition.

C

Summary Introduction

To explain: Establish the relation between F(T1) and F(T2) for the profit at T2 to be equal to zero.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

C

Expert Solution

Answer to Problem 19PS

Hence relation between F(T1) and F(T2) is given by this equation F(T2)=F(T1)×(1+rf)(T2−T1) .

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

At last stage for profit should be zero at time T2 , the below relation should be followed by T1 and T2

F(T2)=F(T1)×(1+rf)(T2−T1)

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Answer 4

Question

Chapter 22, Problem 19PS

A

Summary Introduction

To explain: Calculate the total cash flow in strategy at different time intervals and as per the given information.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

A

Expert Solution

Answer to Problem 19PS

Thus the final cash after T2 years will be F(T2)−F(T1)×(1+rf)(T2−T1) .

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

There are two future prices with definite time period, initially the cash was zero, after one year it will be P1−F(T1) and after two year it will be zero again. Short selling of future contract after two year will be F(T2)−P2 . Number of assets at T1 will be - P1 and sell asset will be + P2 . Now to borrow future price at T1 will be F(T1) and at T2 will be −F(T1)×(1+rf)T2−T1 . Now the final cash flow after T2 years will be F(T2)−F(T1)×(1+rf)(T2−T1) .

B

Summary Introduction

To explain: If arbitrage opportunity is none then why profit will be zero at time T2 .

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

B

Expert Solution

Answer to Problem 19PS

Thus investment at this period is zero and also it is risk free. Hence the total profit also is null when there is no arbitrage opportunity.

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

In the absence of the arbitrage opportunity the profit will be zero because investment in time T2 is risk free and net investment is also zero in this time period. Hence the profit will also be zero at this condition.

C

Summary Introduction

To explain: Establish the relation between F(T1) and F(T2) for the profit at T2 to be equal to zero.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

C

Expert Solution

Answer to Problem 19PS

Hence relation between F(T1) and F(T2) is given by this equation F(T2)=F(T1)×(1+rf)(T2−T1) .

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

At last stage for profit should be zero at time T2 , the below relation should be followed by T1 and T2

F(T2)=F(T1)×(1+rf)(T2−T1)

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 22, Problem 19PS

A

Summary Introduction

To explain: Calculate the total cash flow in strategy at different time intervals and as per the given information.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

A

Expert Solution

Answer to Problem 19PS

Thus the final cash after T2 years will be F(T2)−F(T1)×(1+rf)(T2−T1) .

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

There are two future prices with definite time period, initially the cash was zero, after one year it will be P1−F(T1) and after two year it will be zero again. Short selling of future contract after two year will be F(T2)−P2 . Number of assets at T1 will be - P1 and sell asset will be + P2 . Now to borrow future price at T1 will be F(T1) and at T2 will be −F(T1)×(1+rf)T2−T1 . Now the final cash flow after T2 years will be F(T2)−F(T1)×(1+rf)(T2−T1) .

B

Summary Introduction

To explain: If arbitrage opportunity is none then why profit will be zero at time T2 .

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

B

Expert Solution

Answer to Problem 19PS

Thus investment at this period is zero and also it is risk free. Hence the total profit also is null when there is no arbitrage opportunity.

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

In the absence of the arbitrage opportunity the profit will be zero because investment in time T2 is risk free and net investment is also zero in this time period. Hence the profit will also be zero at this condition.

C

Summary Introduction

To explain: Establish the relation between F(T1) and F(T2) for the profit at T2 to be equal to zero.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

C

Expert Solution

Answer to Problem 19PS

Hence relation between F(T1) and F(T2) is given by this equation F(T2)=F(T1)×(1+rf)(T2−T1) .

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

At last stage for profit should be zero at time T2 , the below relation should be followed by T1 and T2

F(T2)=F(T1)×(1+rf)(T2−T1)

Answer 6

Chapter 22, Problem 19PS

A

Summary Introduction

To explain: Calculate the total cash flow in strategy at different time intervals and as per the given information.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

A

Expert Solution

Answer to Problem 19PS

Thus the final cash after T2 years will be F(T2)−F(T1)×(1+rf)(T2−T1) .

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

There are two future prices with definite time period, initially the cash was zero, after one year it will be P1−F(T1) and after two year it will be zero again. Short selling of future contract after two year will be F(T2)−P2 . Number of assets at T1 will be - P1 and sell asset will be + P2 . Now to borrow future price at T1 will be F(T1) and at T2 will be −F(T1)×(1+rf)T2−T1 . Now the final cash flow after T2 years will be F(T2)−F(T1)×(1+rf)(T2−T1) .

Answer 7

Chapter 22, Problem 19PS

A

Summary Introduction

To explain: Calculate the total cash flow in strategy at different time intervals and as per the given information.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

Answer 8

A

Expert Solution

Answer to Problem 19PS

Thus the final cash after T2 years will be F(T2)−F(T1)×(1+rf)(T2−T1) .

Answer 9

A

Expert Solution

Answer 10

A

Expert Solution

Answer 11

Expert Solution

Answer 12

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

There are two future prices with definite time period, initially the cash was zero, after one year it will be P1−F(T1) and after two year it will be zero again. Short selling of future contract after two year will be F(T2)−P2 . Number of assets at T1 will be - P1 and sell asset will be + P2 . Now to borrow future price at T1 will be F(T1) and at T2 will be −F(T1)×(1+rf)T2−T1 . Now the final cash flow after T2 years will be F(T2)−F(T1)×(1+rf)(T2−T1) .

Answer 13

B

Summary Introduction

To explain: If arbitrage opportunity is none then why profit will be zero at time T2 .

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

B

Expert Solution

Answer to Problem 19PS

Thus investment at this period is zero and also it is risk free. Hence the total profit also is null when there is no arbitrage opportunity.

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

In the absence of the arbitrage opportunity the profit will be zero because investment in time T2 is risk free and net investment is also zero in this time period. Hence the profit will also be zero at this condition.

Answer 14

B

Summary Introduction

To explain: If arbitrage opportunity is none then why profit will be zero at time T2 .

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

Answer 15

B

Expert Solution

Answer to Problem 19PS

Thus investment at this period is zero and also it is risk free. Hence the total profit also is null when there is no arbitrage opportunity.

Answer 16

B

Expert Solution

Answer 17

B

Expert Solution

Answer 18

Expert Solution

Answer 19

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

In the absence of the arbitrage opportunity the profit will be zero because investment in time T2 is risk free and net investment is also zero in this time period. Hence the profit will also be zero at this condition.

Answer 20

C

Summary Introduction

To explain: Establish the relation between F(T1) and F(T2) for the profit at T2 to be equal to zero.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

C

Expert Solution

Answer to Problem 19PS

Hence relation between F(T1) and F(T2) is given by this equation F(T2)=F(T1)×(1+rf)(T2−T1) .

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

At last stage for profit should be zero at time T2 , the below relation should be followed by T1 and T2

F(T2)=F(T1)×(1+rf)(T2−T1)

Answer 21

C

Summary Introduction

To explain: Establish the relation between F(T1) and F(T2) for the profit at T2 to be equal to zero.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

Answer 22

C

Expert Solution

Answer to Problem 19PS

Hence relation between F(T1) and F(T2) is given by this equation F(T2)=F(T1)×(1+rf)(T2−T1) .

Answer 23

C

Expert Solution

Answer 24

C

Expert Solution

Answer 25

Expert Solution

Answer 26

Explanation of Solution

Given information: Future contract price F(T1) at a time interval of T1 , next future price is F(T2) with time period T2 .

At last stage for profit should be zero at time T2 , the below relation should be followed by T1 and T2

F(T2)=F(T1)×(1+rf)(T2−T1)

Answer 27

Ch. 22 - Prob. 1PS Ch. 22 - Prob. 2PS Ch. 22 - Prob. 3PS Ch. 22 - Prob. 4PS Ch. 22 - Prob. 5PS Ch. 22 - Prob. 6PS Ch. 22 - Prob. 7PS Ch. 22 - Prob. 8PS Ch. 22 - Prob. 9PS Ch. 22 - Prob. 10PS

Calculate the total cash flow in strategy at different time intervals and as per the given information. Introduction: An arbitrage strategy is given, first future contract price F ( T 1 ) at a time period of T 1 , now consider the next time period T 2 with future price F ( T 2 ) .

Concept explainers

Videos

To explain: Calculate the total cash flow in strategy at different time intervals and as per the given information.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

Answer to Problem 19PS

Explanation of Solution

To explain: If arbitrage opportunity is none then why profit will be zero at time T2 .

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

Answer to Problem 19PS

Explanation of Solution

To explain: Establish the relation between F(T1) and F(T2) for the profit at T2 to be equal to zero.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

Answer to Problem 19PS

Explanation of Solution

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Chapter 22 Solutions

Calculate the total cash flow in strategy at different time intervals and as per the given information. Introduction: An arbitrage strategy is given, first future contract price F ( T 1 ) at a time period of T 1 , now consider the next time period T 2 with future price F ( T 2 ) .

Concept explainers

Videos

To explain: Calculate the total cash flow in strategy at different time intervals and as per the given information. Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

Answer to Problem 19PS

Explanation of Solution

To explain: If arbitrage opportunity is none then why profit will be zero at time T2 . Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

Answer to Problem 19PS

Explanation of Solution

To explain: Establish the relation between F(T1) and F(T2) for the profit at T2 to be equal to zero. Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

Answer to Problem 19PS

Explanation of Solution

Want to see more full solutions like this?

Chapter 22 Solutions

To explain: Calculate the total cash flow in strategy at different time intervals and as per the given information.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

To explain: If arbitrage opportunity is none then why profit will be zero at time T2 .

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .

To explain: Establish the relation between F(T1) and F(T2) for the profit at T2 to be equal to zero.

Introduction: An arbitrage strategy is given, first future contract price F(T1) at a time period of T1 , now consider the next time period T2 with future price F(T2) .