Assume that the price of a futures contract is higher than the price of the underlying security during the delivery period. Arbitrageurs would
A) buy the futures, simultaneously sell the underlying asset, and pocket the price difference.
B) sell the futures, simultaneously buy the underlying asset, and pocket the price difference.
C) sell the futures, simultaneously sell the underlying asset, and pocket the price difference.
D) buy the futures, simultaneously buy the underlying asset, and pocket the price difference.

Question

Quizplus · Accepted Answer

When the price of a futures contract is higher than the price of the underlying security, arbitrageurs can profit by selling the futures contract and simultaneously buying the underlying asset at its lower price. At the contract's maturity, they can deliver the underlying asset to fulfill the futures contract, pocketing the price difference as profit. This process is known as "cash and carry" arbitrage.

Assume That the Price of a Futures Contract Is Higher