Futures Arbitrage Joan Tam, CFA, believes she has identified an arbitrage opportunity as indicated by the information given below:
Spot price for commodity: $120
Futures price for commodity expiring in one year: $125
Interest rate for one year: 8%
a. Describe the transactions necessary to take advantage of this specific arbitrage opportunity.
b. Calculate the arbitrage profit.
c. Describe two market imperfections that could limit Tam's ability to implement this arbitrage strategy.