34UIUC%20FIN%20300%20Futures%20Corn%20S%26P%20500%20CC%20FV%20ARB%20%28Answers%29%20FA%2009%20v2

34UIUC%20FIN%20300%20Futures%20Corn%20S%26P%20500%20CC%20FV%20ARB%20%28Answers%29%20FA%2009%20v2

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UNIVERSITY OF ILLINOIS College of Business - Department of Finance - Finance 300 (Financial Markets) Professor James Jackson Futures Market Arbitrage Opportunities and the Cost of Carry Decision Rule: If the ABS (Basis) > Cost of Storage per Unit ($), then the arbitrageur will simultaneously buy spot market corn at the spot market price and sell the requisite number of futures contracts at the futures market price. The arbitrageur will then hold the corn in storage for the determined time period and then deliver the corn to capture the arbitrage profit. Time Period Futures Prices Spot Prices Basis ($) Time (Months) Cost of Storage per Month Cost of Storage per Unit ($) F.V. Arbitrage per Unit ($) Arbitrage P&L ($) Arbitrage R.O.I. A $3.19 $3.00 -$0.19 3 $0.01 $0.03 $3.03 $0.16 $8,000.00 0.05281 B $3.07 $2.96 -$0.11 5 $0.02 $0.10 $3.06 $0.01 $500.00 0.00327 C $3.11 $2.75 -$0.36 7 $0.05 $0.35 $3.10 $0.01 $500.00 0.00323 D $3.22 $2.85 -$0.37 8 $0.06 $0.48 $3.33 ($0.11) ($5,500.00)
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This note was uploaded on 02/10/2011 for the course FIN 300 taught by Professor Staff during the Spring '08 term at University of Illinois, Urbana Champaign.

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34UIUC%20FIN%20300%20Futures%20Corn%20S%26P%20500%20CC%20FV%20ARB%20%28Answers%29%20FA%2009%20v2

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