Forwards and Futures Question 1
Business is slow at Rosie’s Canteena. Hawkeye has come up with a plan for Rosie to make a
little extra money. Looking in the paper, Hawkeye finds the following information:
i.) Shell casings are currently selling for $18.00 a box.
ii.) The prime rate (assume rate to borrow or invest) is currently 7% (compound quarterly).
iii.) Commissions to trade are 2.25% of the security value.
Based on this information, what action should Hawkeye tell Rosie to take if the one-year
futures price for a box of shell casings is currently:
a. $17.90? Why? Show all work. (2 points)
b. $19.30? Why? Show all work. (2 points)
c. When will Rosie make money? Why? (2 points)
NOTE: You must test both a simple and reverse arbitrage opportunity in each case