Tony’s Report on Starbucks’ Stock

Assume you have $1mio in capital. Demonstrate there is no arbitrage between the spot and futures prices for a
chosen commodity (please choose Starbucks’ stocks as commodity) for a 1-year historical period. Be sure
incorporate all the real-world frictions that would arise if you were implementing the arbitrage such as interest
rates, storage, insurance, trans-portation costs, natural disasters, theft, fraud, etc.Turn in a report which
contains the following:

  1. Describe the forwards/futures pricing model that is appropriate for the asset you select(Starbucks). This
    could be formulas 1, 2, or 3 above, or some variation of these.(the three formulas will be attached as three
  2. Clearly outline the arbitrage strategy, and show the payoffs for one sample trade. State how large your
    trades will be, being mindful of the practical limits (i.e. you only have $1mio in the capital.)
  3. Track the growth of your $1mio in the capital. Show your returns by month in tabular format and for the entire period using an equity curve. Also, compute the volatility and Sharpe ratio of this arbitrage strategy.

Sample Solution