Use the following information to answer questions 22 through 24.On October 1,the one-month LIBOR rate is 4.50 percent and the two month LIBOR rate is 5.00 percent.The November Fed funds futures is quoted at 94.50.The contract size is $5,000,000.
-All of the following are limitations to Fed funds futures arbitrage,except
A)Fed funds rates are determined by Federal Reserve Bank policy
B)basis risk between Fed funds and LIBOR
C)repo rate is variable for the trading horizon
D)settlement is based on average in delivery month
E)transaction costs

Question

Quizplus · Accepted Answer

The limitations to Fed funds futures arbitrage include basis risk between Fed funds and LIBOR, variable repo rates, settlement based on average in delivery month, and transaction costs. The Fed funds rate is determined by Federal Reserve Bank policy, but this is not a limitation to Fed funds futures arbitrage as it is a key driver of the futures contracts.

Use the Following Information to Answer Questions 22 Through 24