Which one of the following statements is correct concerning an inverted futures market?
A)The basis will be negative.
B)The basis will equal zero.
C)The cash price will equal the futures price.
D)The cash price will exceed the futures price.
E)Arbitrage opportunities must exist.

Question

Quizplus · Accepted Answer

In an inverted futures market, the cash price will exceed the futures price as there is a higher demand for the underlying asset in the current market than in the future market. This creates a situation where buyers are willing to pay more for the asset in the cash market than the futures market. As a result, the basis will be positive. This creates an opportunity for arbitrage traders to sell the asset in the cash market and buy it back in the futures market to lock in a profit.

Which One of the Following Statements Is Correct Concerning an Inverted