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Disparity between the two markets

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You are a market-maker and an arbitrageur in the forward market. An asset is trading for $120 and $110 in the spot and the forward market, respectively, and these prices seem to be out of line. Today is December 27, 2021, and the forward contract is set to expire on
December 27, 2022. The term structure of U.S. money-market interest rates is provided in the table below. These rates are expressed in decimals.

Term Ending date Rate

0x3 2022-03-28 0.00221
0x6 2022-06-28 0.00330
0x9 2022-09-27 0.00435
0x12 2022-12-27 0.00540

(A) Confirm that there exists a price disparity between the two markets and implement the arbitrage strategy that will enable you to exploit it. Spell out each step of your strategy carefully, in the proper sequence, and calculate the profit that you will derive from it. The contract size is 10,000 units of the asset.

(B) As it turns out, the asset will pay $15 in income on June 28, 2022. Does this explain the price disparity that you observe between the two markets in A)? If not, implement the strategy that will enable you to take advantage of this price disparity. Spell out each step of your strategy carefully, in the proper sequence, and calculate the profit that you will derive from it. The contract size is the same a

Reference no: EM133121017

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