You borrow $5,000 at 8% per year and proceed to buy Asset XYZ for $5,000 in the cash market. This asset pays $100 quarterly. You then immediately sell a futures contract at $5,500 requiring delivery of asset XYZ in three months. Which of the below statements is TRUE?

Question

Quizplus · Accepted Answer

A) At the end of three months, the total amount received from the futures contract would be $5,500 (the contract price), plus $100 (the quarterly payment received from owning the asset), which equals $5,600. Therefore, statement A is true.

B) The interest cost of borrowing $5,000 at 8% per year would be $100 (8% of $5,000 divided by 4), and there would be four interest payments over the three months. Therefore, the total outlay would be $5,000 + $100 + $100 + $100 + $100 = $5,400. Statement B is false.

C) The profit from this strategy can be calculated as follows: total proceeds received from selling the futures contract ($5,500) - the cost of the loan ($5,400) - the cost of acquiring the asset ($5,000) = $100. Therefore, statement C is false.

D) Both statements A and B are partially true, and statement C is false. Therefore, the correct answer is D.

You Borrow $5,000 at 8% Per Year and Proceed to Buy