Name(s)_____________________________________________________________________________

Homework #2 – 80 Points Total

*Due at the beginning of class on Monday, October 1st.
**You may work in groups of up to 4 people; just put all of the names at the top of this page.
Your group should only hand in one homework.
**Please print this HW one-sided and write in the space provided (I will try to leave plenty of
space, but use the back of the page if you need to). Please show all work for full credit!

Question 1 (25 points)

You are working on a currency arbitrage desk. You look up exchange rates and interest rates for the USD
versus the Canadian Dollar (CAD) and find the following:

The current spot rate is 0.769 USD/CAD. The 10-month forward exchange rate is 0.713 USD/CAD
(note: Canadian dollar futures contracts are 100,000 CAD each). The 10-month T-bill yield in the USA
is 2.54% (assume this is continuously compounded and annualized) and the 10-month risk-free rate in
Canada is 1.94% (also continuously compounded and annualized). What is the arbitrage trade, and what
is your profit per futures contract?

Homework #2
MGMT 41150 – Futures and Options
Professor Boquist
(Blank page – extra space for question 1 answer)

Homework #2
MGMT 41150 – Futures and Options
Professor Boquist
Question 2 (25 points)
You have a short position on a Treasury bond futures contract. The most recent settlement price is
101-06, and the accrued interest is on the bond you have chosen to deliver is $0.47. The bond you have
chosen to deliver is a 9% coupon bond with 19 years, 5 months and 12 days left until maturity. What will
you receive at delivery?

Homework #2
MGMT 41150 – Futures and Options
Professor Boquist
(Blank page – extra space for question 2 answer)

Homework #2
MGMT 41150 – Futures and Options
Professor Boquist
Question 3 (20 points)
The current spot price of gold is $1,315 per ounce. The 11-month risk free rate is 0.75% (annualized,
continuously compounded). Your broker quotes you an 11-month futures contract at $1,391. Assume
storage costs are $0.23 monthly per ounce, paid at the end of the storage period. What is the correct
theoretical futures price? What is the arbitrage trade/profit using the price you were quoted?

Homework #2
MGMT 41150 – Futures and Options
Professor Boquist
Question 4 (10 points)
If the Treasury bond futures price is 99-12, which of the following bonds is cheapest to deliver?

Bond Price Conversion Factor

1 99-05 0.911
2 111-01 1.029
3 135-08 1.387

Homework #2
MGMT 41150 – Futures and Options
Professor Boquist