Question

On March 15 the cash SP500 is priced 1000. The SP500 futures contract which matures 9...

On March 15 the cash SP500 is priced 1000. The SP500 futures contract which matures 9 months later in December has a price of 1200. The risk-free interest rate over this 9-month period is 5% while the dividend yield is 3%. Would an investor be better of investing his money in the spot SP500 or buying the futures contract on this index?

better to invest in the spot market only if it increases more than the futures market over this 9-month period

better to invest in the futures market only if it increases more than the spot market over this 9-month period

better to invest in the spot market it cannot be determined since the price of the of futures contract and the price of the spot in December is not known on March 15

better to invest in the futures market

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

We calculate the implied futures price by using the formula = 1000 x exp[(0.05-0.03)x3/4] = 1015.1. Hence, the investor can get the cash S&P500 right now and hold it for 9 months and sell the futures available right now to make an arbitrage profit. SO, he will be better off investing in the spot market itself. We don't know what the prices of the spot and futures be in December but looking from an investing perspective, it would be beneficial to buy and hold the S&P right now as it is available cheaper. Option C.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
As the time to delivery on a futures contract converges to zero, which of the following...
As the time to delivery on a futures contract converges to zero, which of the following statements are true? Check all that apply. Select one or more: a. The spot price has to exceed the futures price b. If the futures price were larger than the spot price of the underlying, then an investor could make a riskless profit by selling the underlying and buying the futures contract c. If the spot price of the underlying were larger than the...
“Today” is late March. Your company, Mesquite Bush Refining Inc., produces 42,000,000 gallons of ultra low...
“Today” is late March. Your company, Mesquite Bush Refining Inc., produces 42,000,000 gallons of ultra low sulfur diesel (ULSD) fuel at the end of each month. You have the following market data. Spot price of ULSD diesel fuel: S0 = $1.79/gal. Futures price of June NYMEX New York Harbor ULSD futures: F0 = $2.10/gal. Size of the underlying for this futures contract: 42,000 gallons Trading in a NYMEX New York Harbor ULSD contract ceases shortly before the contract month begins....
A. An investor enters into a futures contract covering 100 ozs. of gold. At the time...
A. An investor enters into a futures contract covering 100 ozs. of gold. At the time the underlying price of gold is $1,525 per ounce. At the end of the year the investor is still holding the contract and the underlying price of gold under the contract is $1,450 per ounce. On March 1, of the following year, the investor takes delivery of 100 ozs. of gold under the contract when the price of gold is $1,400 per ounce. What...
1. Which of the following statements regarding futures contracts is false? a)      Both the buyer and...
1. Which of the following statements regarding futures contracts is false? a)      Both the buyer and the seller can get out of the contract at any time by selling it to a third party at the current market price. b)      Futures prices are not prices that are paid today. Rather, they are prices agreed to today, to be paid in the future. c)      Futures contracts are traded anonymously on an exchange at a publicly observed market price and are generally...
The premium paid on an option contract (either a put or a call) represents the compensation...
The premium paid on an option contract (either a put or a call) represents the compensation the buyer of the option receives from the seller (writer) of the option for the ability to use the option if it becomes profitable. If the buyer of the option does not use the option before expiration, this premium must be returned back to the seller (writer) at the time the option expires. True False 2 points    QUESTION 3 On the day of...
(Alternative Assets & StockTrak) The EIA, which releases oil inventory data every Wednesday, attempts to explain...
(Alternative Assets & StockTrak) The EIA, which releases oil inventory data every Wednesday, attempts to explain what happened in a link I posted to Canvas. Which of the following statements is most likely FALSE: Near contract maturity, oil futures contracts can involve physical delivery or can be rolled over to other contracts US consumption of oil and petroleum products has declined sharply due to COVID-19 Cushing, Oklahoma, is the primary location in the US where physical delivery of oil takes...
6. You are an investor and have just purchased a bond on July 1 which pays...
6. You are an investor and have just purchased a bond on July 1 which pays interest every March 1 and September 1. When you receive your first interest cheque, you will receive and have earned how many months interest? Received Earned 1 6 6 2 6 2 3 2 2 4 4 4 Choice 1 Choice 2 Choice 3 Choice 4 8. KR Corporation was involved in a lawsuit with the Government alleging inadequate air pollution control facilities at...
Exercise 11-15 a On March 10, 2022, Swifty Company sells equipment that it purchased for $197,760...
Exercise 11-15 a On March 10, 2022, Swifty Company sells equipment that it purchased for $197,760 on August 20, 2015. It was originally estimated that the equipment would have a life of 12 years and a salvage value of $17,304 at the end of that time, and depreciation has been computed on that basis. The company uses the straight-line method of depreciation. Compute the depreciation charge on this equipment for 2015, for 2022, and the total charge for the period...
Constructing and Assessing Income Statements Using Cost-to-Cost Method On March 15, 2014, Frankel Construction contracted to...
Constructing and Assessing Income Statements Using Cost-to-Cost Method On March 15, 2014, Frankel Construction contracted to build a shopping center at a contract price of $125 million. The schedule of expected (which equals actual) cash collections and contract costs follow ($ millions): Year Cash Collections Cost Incurred 2014 $ 30 $ 20 2015 50 45 2016 45 35 Total $ 125 $ 100 (a) Calculate the amount of revenue, expense, and net income for each of the three years 2014...
Constructing and Assessing Income Statements Using Cost-to-Cost Method On March 15, 2012, Frankel Construction contracted to...
Constructing and Assessing Income Statements Using Cost-to-Cost Method On March 15, 2012, Frankel Construction contracted to build a shopping center at a contract price of $120 million. The schedule of expected (which equals actual) cash collections and contract costs follow ($ millions): Year Cash Collections Cost Incurred 2012 $ 30 $ 25 2013 50 20 2014 40 40 Total $ 120 $ 85 (a) Calculate the amount of revenue, expense, and net income for each of the three years 2012...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT