The Spot Price Trades at a Bid/ask Quote of 100-101

question 6

Multiple Choice

The spot price trades at a bid/ask quote of 100-101 (you can buy at 101 and sell at 100) . The one-year forward trades at 99-101.90 (you can buy forward at 101.90 and sell forward at 99) . If the simple interest rate for one year is 2%, which of the following statements is most accurate?

• A) You can execute an arbitrage by buying spot and selling forward.
• B) You can execute an arbitrage by selling spot and buying forward.
• C) You can execute an arbitrage by selling spot, buying forward, and investing the proceeds of the spot sale at 2%.
• D) You cannot execute an arbitrage at these prices.

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Definitions:

Investment Spending

Expenditures on capital goods used to produce goods and services in future periods.

Recessions

Periods of economic decline during which trade and industrial activity are reduced, identified by a fall in GDP in two successive quarters.

Aggregate-Demand Curve

A graphical representation showing the relationship between the overall price level in the economy and the total demand for goods and services.

Aggregate Demand

The total demand for all goods and services in an economy at a given overall price level and time.