Theoretically, arbitrage ensures that:
A) the offer forward rate is equal to the futures bid rate
B) the offer forward rate is equal to the futures offer rate
C) the futures offer rate is equal to the futures bid rate
D) the bid-offer spread in the forward and futures markets are equal

Question

Quizplus · Accepted Answer

Theoretically, arbitrage ensures that the offer forward rate is equal to the futures bid rate. This is because if the offer forward rate is higher than the futures bid rate, then an arbitrageur can buy the futures contract at the bid rate and sell it forward at the offer rate, making a riskless profit. Similarly, if the offer forward rate is lower than the futures bid rate, then an arbitrageur can sell the futures contract at the offer rate and buy it back at the bid rate, again making a riskless profit.

Theoretically, Arbitrage Ensures That