Can you help me please ? Suppose you observe the following one-year interest rates, spot exchange rates and futures prices. Futures contracts are available on €10,000. How much risk-free arbitrage profit could you make on one contract at maturity from this mispricing? Bid Interest Rate S0($/€) $1.45 = €1.00 i$ 4% F360($/€) $1.47 = €1.00 i€ 3% A) $59.22 B) $53.10 C) $49.42 D) none of the options

Someone, answer that but I don't get it:


A) $59.22

Explanation:

The futures are the contracts that are set in present for settlement at some future date. These contracts can be tailor made or over the counter. Usually futures trade in OTC market with defined contract size. In the given question the contract size is for €10,000. The denomination in dollar will be :

For Bid price : €10,000 * $1.45 / € = 14,500

For Ask price : €10,000 * $1.47 / € = 14,700

The difference in the bid-ask is 200.

The arbitrator could benefit from this price difference.

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