Explanation:
The correct answer is B.
When the futures price is below the spot price (i.e., the market is in backwardation), an arbitrageur can earn a riskless profit by buying the futures contract (going long) and simultaneously selling the underlying commodity at the higher spot price. As the futures contract converges to the spot price at expiration, the long futures position will gain value (from $47.6 toward $48.9), while the short spot position was locked in at the higher price. The arbitrage profit equals the difference between the spot price and the futures price, which is $48.9 - $47.6 = $1.3 (ignoring transaction costs and financing costs).
Q.610 Elif Makarov, a derivatives trader at one of the largest commodities trading firms in Moscow, is looking at a possible arbitrage trade in the copper futures contract. If the copper futures contract price is $47.6 and the spot price of copper is $48.9, then determine the appropriate strategy Makarov may take to earn the arbitrage profit.
A
Take a short position in the copper futures contract and buy copper at the spot price.
B
Take a long position in the copper futures contract and sell copper at the spot price.
C
Wait for copper futures contracts to converge to the spot price and then take a short position in futures contracts.
D
Wait for copper futures contracts to converge to the spot price and then take a long position in futures contracts.
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