Is futures overpriced or underpriced relative to fair value

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Reference no: EM13975203

The current price of silver is $30 per ounce. Assume that the storage cost is zero. The 3-month interest rate is 4% per annum (with continuous compounding). A CME silver futures contract is current trading at $28 (per ounce) will mature in three months. The size of the contract is 5,000 ounces. Ignoring bid-ask spread and transaction costs, identify the arbitrage opportunity and show how you can capture it (and have net cash inflow today).

Determine the fair 3-month futures price, F*.

Is the futures overpriced or underpriced relative to its fair value F*?

Show the related transactions and the current and future cash flows. (Trade just one contract)

Reference no: EM13975203

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