Suppose you are a market-maker in the LuSE Index forward contracts. The LUSE Index spot price...
Suppose you are a market-maker in the LuSE Index forward contracts. The LUSE Index spot price is K550 and the annual risk free rate is 5%.
i.Calculate the forward price for delivery in 9 months. (3 Marks)
ii.If the actual forward price is K561, how can you take advantage on this situation? (4 Marks)
iii.What are the problems that you will face in taking advantage of the situation? (3 Marks)
Homework Answers
I. The forward price for delivery in 9 months is 550* 1.0375= K570.625.
Ii. As expected forward price is K570.625 and actual forward price is K561 arbitrage opportunity exists. We should sell the forward and invest the amount in buying spot.
III. There will be no problem while taking advantage of the situation except finding a buyer for the same.
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