Concept explainers
A
To explain: Calculate the total cash flow in strategy at different time intervals and as per the given information.
Introduction: An arbitrage strategy is given, first future contract price
A
Answer to Problem 19PS
Thus the final cash after
Explanation of Solution
Given information: Future contract price
There are two future prices with definite time period, initially the cash was zero, after one year it will be
B
To explain: If arbitrage opportunity is none then why profit will be zero at time
Introduction: An arbitrage strategy is given, first future contract price
B
Answer to Problem 19PS
Thus investment at this period is zero and also it is risk free. Hence the total profit also is null when there is no arbitrage opportunity.
Explanation of Solution
Given information: Future contract price
In the absence of the arbitrage opportunity the profit will be zero because investment in time
C
To explain: Establish the relation between
Introduction: An arbitrage strategy is given, first future contract price
C
Answer to Problem 19PS
Hence relation between
Explanation of Solution
Given information: Future contract price
At last stage for profit should be zero at time
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