You lend $200 at 8% per year for three months and proceed to short sell Asset XYZ for $200 in the cash market. You are required to pay $6 to the lender of Asset XYZ (which is the proceeds the lender would have received). You then immediately buy a futures contract at $184 for delivery of asset XYZ in three months (this will cover your short position). What is the net profit or loss from your strategy of lending money, short selling, and buying the futures contract?

Question

Quizplus · Accepted Answer

The interest earned from lending $200 at 8% per annum for three months is $4. The cost of short selling Asset XYZ is $6. The profit from the futures contract is $16 ($200 - $184). The net profit is $4 (interest) - $6 (short selling cost) + $16 (futures profit) = $14.

You Lend $200 at 8% Per Year for Three Months