Suppose that the forward ask price for November 7 on euros is $0

Business Sep 16, 2020

Suppose that the forward ask price for November 7 on euros is $0.9227 at the same time that the price of IMM euro futures for delivery on November 7 is $0.9045. Can an arbitrageur profit from this situation?

Expert Solution

Since the Forward price exceeds the future rate, the arbitrageur should buy futures contracts at $0.9045 and sell euro forward in the same amount at $0.9227. The arbitrageur will earn 125,000*(0.9227-0.9045) = $2275 per euro futures contract arbitraged.

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