A security is expected to pay a coupon of £5 in two months and £5 in five months. The security price is £220 and r = 3.5% per annum for all maturities. An investor has taken a short position in a 6-month futures contract on the stock. What are the futures price and initial value of the futures contract?
(b) Three months later, with r still at 3.5%, the security price is £208. Calculate the value of the short position in the futures contract. If an investor observes that the value of the short position is quoted as £10, how can a riskless profit be made?
