Economics Homework Help

In no less than 200 words, provide the correct answers to the two questions below and explain the answers to the questions. Use at least one example for each question.

Question 1.

Let’s say stock in Sony is trading at $127.50 on the Shanghai Exchange. That same stock is trading at $129.50 on Nasdaq. I decide to buy 50 stocks in the Shanghai Exchange and then sell them in Nasdaq. Which statement is correct below:

A) This is considered backwardation. My Profit is $50. The decrease in demand for the lower stock pushes the price of the higher stock up.

B) This is considered arbitrage. My Profit is $75. The decrease in demand for the lower stock pushes the price of the higher stock down.

C) This is considered arbitrage. My Profit is $100. The increase in demand for the lower stock pushes the price of the higher stock down.

D) None of these statements are correct.

Question 2.

Contango vs Backwardation, which statement below is correct?

A) Contango is when the future price is anticipated to be less expensive than the spot price. Backwardation is when the future price is anticipated to be more expensive than the spot price.

B) Contango is when the future price is anticipated to be more expensive than the spot price. Backwardation is when the future price is anticipated to be less expensive than the spot price.

C) Contango is when the future price is anticipated to be less expensive than the spot price. Backwardation is when the future price is anticipated to be less expensive than the spot price.

D) None of these statements are correct.