You borrow $1,000 at 16% per year and proceed to buy Asset XYZ for $1,000 in the cash market. This asset pays $10 quarterly. You then immediately sell a futures contract at $1,025 requiring delivery of asset XYZ in three months. What is the net profit or loss from your strategy of selling the futures contract after borrowing money to buy the asset ?

Question

Quizplus · Accepted Answer

The asset pays $10 in three months, and the futures contract is sold for $1,025. The interest on the borrowed $1,000 for three months at 16% per year is $40. The net profit is $10 (dividend) + $25 (futures profit) - $40 (interest) = -$5.

You Borrow $1,000 at 16% Per Year and Proceed to Buy