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Design an arbitrage

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Reference no: EM132121058

The data in this problem is hypothetical. It is March now. A September futures contract on 10,000 MMBtu of natural gas settled for $2.95 per MMBtu. Assume that the contract has exactly 6 months to maturity. Present value of six months worth of storage costs is $.05 per MMBtu. The spot price is $2.78. The interest rate is 3% annually. (Hint: this means that in order to buy natural gas spot to put it in storage you need to borrow at 3% per annum).

1) Design an arbitrage. Show your profit per one contract. Use continuous compounding to calculate future value.

2) How much would the storage and insurance costs have to be to wipe away your arbitrage profit if the futures price is $2.95?

Reference no: EM132121058

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