Suppose silver is currently selling at $4.23 per ounce in the spot market. Assume that the current risk-free rate (implied repo rate) is 3.75% and that silver contracts involve 5000 ounces each.
a. Ignoring carrying costs and cash flows, what should the 6 month (180 days) silver futures contract be selling for according to the cost-of-carry model? ($21,550 (at a price of $4.31/oz.) )
b. If the 6 month (180 day) futures contract for silver is selling for $4.40 per ounce, what should you, as an investor, do? What profit will you realize if you decide to work with one (1) silver contract? (cash-and-carry arbitrage (profit: $453.44) )
Please answer without the use of excel. The answers are in the parenthesis I just need to know how to solve.