# Johnny's SS 16Q

Johnny is casually reading the WSJ in central park one day and sees the following bid/asked prices and borrowing/lending rates: Spot Bid: \$50.00 Asked: \$50.50 Forward (30 day contract) Bid: \$49.75 Asked: \$50.10 Interest Rates 6% Invest 7% Borrow The next cash flow on the asset is 1.00 paid in 60 days. Johnny writes down some quick notes and finds that: a) Arbitrage is possible for a profit of \$0.05 b) Arbitrage is not possible c) Arbitrage is possible for a profit of \$0.14

C

cfaboston28 Wrote: ------------------------------------------------------- > C You da man cfa b 28 - and you are correct

PP. We’ll see in august. Long night ahead of you, correct?

Phil - can you post the Stalla solution to this. I have no ide what they want from me as an answer. The data is over my head too. Probably too much cars at the Auto show want me to be a sales model than fight out here in finance.

Spot Bid: \$50.00 Asked: \$50.50 No arbitrage Forward Rates : Bid : 50.00 *(1.06)^(30/360) = 50.24 Ask: 50.50 *(1.07)^(30/360) = 50.78 Given Forward rates : Bid:49.75 , Ask : 50.10 since the given ASK is lower than the no arbitrage bid price, arbitrage is possible. 50.24 - 50.10 = \$0.14 hence ©

Thanks for enlightening me charu_mulye - Passmaster always ‘passes me out’.