Mkt price of a 3 month bond $78 Sppot price of cheapest to deliver bond $85 conversion factor for cheapest to deliever bond (including accrued interest) 1.13 Cheapest to deliever bond 7.5% coupon (next payment in 3 months) annualised risk free rate 4% determine the fair value of the treasury bond futures contract price and whether or not an arbitrage profits is possible. a. $72.64, arbitrage possible b. $78, no arbitrage c. $82.08 arbitrage possible
The answer is A but i can’t really follow the how they are handling the coupon interest.