What is likely to happen if the futures price for Treasury bonds to be delivered in three months is above the spot price plus the carrying costs?
A)An arbitrageur will buy Treasury bonds in the spot market and sell a futures agreement.
B)An arbitrageur could sell Treasury bonds in the spot market while buying a futures agreement.
C)An arbitrageur could purchase Treasury bonds in the spot market while buying a futures agreement.
D)An arbitrageur could sell Treasury bonds in the spot market while selling a futures agreement.

Question

Quizplus · Accepted Answer

If the futures price is above the spot price plus carrying costs, there is an opportunity for arbitrage. An arbitrageur can buy Treasury bonds in the spot market at the lower price, and sell a futures agreement at the higher price, profiting from the difference. This buying and selling activity will likely bring the futures price back in line with the spot price plus carrying costs.

What Is Likely to Happen If the Futures Price for Treasury