Construct an arbitrage trade to take advantage

Reference no: EM131477964

Question: 1. Why does market efficiency matter? Why is having "correctly" priced securities so important?

2. Consider the following trade. German government bond (bund) futures trade on the LIFFE (London) and DTB (Frankfort) exchanges. The futures contracts have identical terms involving the delivery of €250,000 face value bonds at time T. An investor observes that the LIFFE contract trades for €240,000 while the DTB contract trades for €245,000. Construct an arbitrage trade to take advantage of this. Is this perfect arbitrage? What are some of the risks involved.

Reference no: EM131477964

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