Continue with the last question. The futures price should be $99.71 based on our analysis if the spot price is $98, the life of the futures contract is 136 days, and the interest rate is 4.75%. If the future is selling for $100, what should an arbitrageur do to net a riskless, positive return?

Correct Answer: He should borrow money to buy the asset for $98, and sell the futures for $100.

He will then hold the asset for 136 days, and deliver it to receive $100 when the contract expires. The cost is 98 (1.0475) 136/365 - $98 = $1.71, the interest on $98 at an annual interest of 4.75%. The riskless profit is $100 - $98 - $1.71 = $0.29.