The current price of silver is $30 per ounce. Assume that the storage cost is zero. The 3-month interest rate is 4% per annum (with continuous compounding). A CME silver futures contract is current trading at $28 (per ounce) will mature in three months. The size of the contract is 5,000 ounces. Ignoring bid-ask spread and transaction costs, identify the arbitrage opportunity and show how you can capture it (and have net cash inflow today).
Determine the fair 3-month futures price, F*.
Is the futures overpriced or underpriced relative to its fair value F*?
Show the related transactions and the current and future cash flows. (Trade just one contract)