Question

A stock index spot price is $1,287. the zero coupon interest rate is 3.8%. what is the potential arbitrage profit if the 6-month futures contract on the index is priced at $1,350

Answer 1

The potential profit if the future contract on the index for the stock is priced at $1350 will be $39.45.

What is potential profit?

The ability or the capacity of an individual or a group to potentially earn higher amount of monies in the future trading transactions during a given financial period, is known as potential profit.

The computation of potential profit will be such that the return at the rate of 3.8% would have a given a maximum return of $48.9 annually($24.45 in 6 months); however, the index after 6 months is priced at $1350.

Potential Profit= 91350-1335+24.450 = $39.45

Hence, the potential profit is as computed above.

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