Question

In: Economics

If the present value of the forward price of 1 barrel of oil is higher than...

If the present value of the forward price of 1 barrel of oil is higher than today's price of oil, an arbitrageur should:

If the present value of the forward price of 1 barrel of oil is higher than today's price of oil, an arbitrageur should:

If the present value of the forward price of bushel of wheat is lower than today's price of wheat, an arbitrageur should:

Short wheat in the spot market, and long in the forward market
Long wheat in the spot market, short wheat in the forward market
Short wheat in the spot market and short in the forward market

Long wheat in the spot market and also in the forward market

If you draw the cash flow diagrams of all the steps in an arbitrage strategy, the sum of the cash flows should

Be zero for all periods if all the prices are in equilibrium
Be zero if the strategy is profitable
Be positive if all the prices are in equilibrium
Be negative is the strategy is profitable

Solutions

Expert Solution

Short: Sell.

Long: Buy.

If the present value of the forward price of 1 barrel of oil is higher than today's price of oil, an arbitrageur should:

Long oil in the spot market, short oil in the forward market.

If the present value of the forward price of 1 barrel of oil is higher than today's price of oil, an arbitrageur should:

Long oil in the spot market, short oil in the forward market

1. If the present value of the forward price of bushel of wheat is lower than today's price of wheat, an arbitrageur should:

Correct answer :Short wheat in the spot market, and long in the forward market

Reason: So that we can Sell bushel of wheat in the spot market at spot rate for bushel of wheat. Take a long position today at forward market at forward rate so you will get the profit using risk-arbitrage strategy. This strategy can be used for hedging also in the future market.

2. Long wheat in the spot market and also in the forward market

If you draw the cash flow diagrams of all the steps in an arbitrage strategy, the sum of the cash flows should

Correct answer : Be zero for all periods if all the prices are in equilibrium.

Reason: If there is no difference in prices then there is no room for profit or loss.

Rahul Sunny answered 1 year ago
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