To prevent arbitrage,the futures price must be:
A)less than (or equal to)the current spot price plus the carrying price.
B)greater than (or equal to)the current spot price plus the carrying price.
C)less than the present value of all carrying costs.
D)greater than the present value of all carrying costs.

Question

Quizplus · Accepted Answer

The futures price must be less than or equal to the current spot price plus the carrying price to prevent arbitrage. This is because if the futures price were higher than the spot price plus carrying costs, then an arbitrageur could buy the spot commodity, store it, and sell it at the higher futures price, making a risk-free profit.

To Prevent Arbitrage,the Futures Price Must Be