You believe you have identified an arbitrage opportunity for contracts on live cattle as indicated...
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You believe you have identified an arbitrage opportunity for contracts on live cattle as indicated by the following information: The spot (current) price for 1 cow is $2200, the futures price for 1 cow expiring in 1 year is $2500, and the interest rate for 1 year is 8%. (a) (3 points) Is the futures contract overpriced or underpriced relative to the spot market? (b) (4 points) Describe all transactions necessary to take advantage of this specific arbitrage opportunity, including when they take place and the prices associated with them. Be sure that your method does not require you to invest any pre- existing funds. (c) (3 points) Your roommate decides they don't like having to share space in your small apartment with the cow (whose name is Bessie). They decide to charge you $132 for every year that Bessie lives with you for the trouble of living with a cow. Is the arbitrage strategy still profitable? Why or why not? (d) (3 points) In reality, traders don't take cows home with them, but rather merely buy "ownership" of the cattle, not possession. If the cost of feeding and taking care of a cow like Bessie is about $400 per year, what should the price of a 1 year futures contract be
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