Question

The spot SP500 index is 300. The futures contract on this index which expires in one...

The spot SP500 index is 300. The futures contract on this index which expires in one year is 310. The risk-free rate over this period is 5%. The dividend yield over this period is 3%. There is an arbitrage. How would you initiate this arbitrage?

short futures, long stock, borrow money

long futures, long stock, borrow money

long futures, short stock, lend money

short futures, long stock, lend money

short futures, short stock, lend money

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

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
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...
A stock index is at 1213.52. A futures contract on the index expires in 121 days....
A stock index is at 1213.52. A futures contract on the index expires in 121 days. The price of the futures contract is 1358.50.The risk-free interest rate is 4.50 percent. The value of the dividends reinvested over the life of the futures is 245.0. (a) Show that the futures contract above is mispriced by computing what the price of this futures contract should be. (b) Show how an arbitrageur could take advantage of the mispricing.
Suppose that an Intel single-stock futures contract expires in four months. The stock pays a dividend...
Suppose that an Intel single-stock futures contract expires in four months. The stock pays a dividend in two months. We have the following information. Annualized, continuously compounded risk-free interest rate for 2-month period: r = 3.4%. Annualized, continuously compounded risk-free interest rate for 4-month period: r = 6.96%. Current spot price of Intel stock: $29 per share. Dividend per share of $0.38 in two months. What must the futures price equal in order than no arbitrage opportunity exist?
A stock index currently has a spot price of $1,100. The risk-free rate is 9%, and...
A stock index currently has a spot price of $1,100. The risk-free rate is 9%, and the index does not pay dividends. You observe that the 3-month forward price is $990. What arbitrage strategy would you undertake? a. Sell a forward contract, borrow $1,100, and buy the stock index b. Sell a forward contract, lend $1,100, and short-sell the stock index c.Sell a forward contract, borrow $1,100, and short-sell the stock index d. Buy a forward contract, borrow $1,100, and...
Smith holds a long position for a Stock index futures contract which is four months from...
Smith holds a long position for a Stock index futures contract which is four months from maturity. A stock index currently stands at 350. The risk-free interest rate is 8% per annum (with continuous compounding) and the dividend yield on the index is 4% per annum. a) What should the futures price for a four-month contract be? b) Suppose one month later the stock price is 351. The dividend yield and index are the same. What is the value of...
Consider a single-stock futures contract on Best Buy Co. The company will pay a quarterly dividend...
Consider a single-stock futures contract on Best Buy Co. The company will pay a quarterly dividend of $0.17 per share prior to expiration of the futures contract. Consider the following scenario. The stock goes ex-dividend in one month; for convenience, we will assume that the dividend is paid at that time. Assume that this dividend is the only one prior to expiration of the futures contract. Annualized, continuously compounded risk-free interest rates: r1 = 3% for one month, and r2...
You have the following market data. Spot price of the Japanese Yen is $0.009185. Underlying asset...
You have the following market data. Spot price of the Japanese Yen is $0.009185. Underlying asset for the Japanese Yen futures contract is 12,500,000 Yen. 3-month Japanese LIBOR rate is 2.14% per year, and the 3-month U.S. LIBOR rate is 2.76% per year. Both rates are continuously compounded. Japanese Yen futures contract that expires in 3 months has a futures price of $0.009030. What is the general arbitrage strategy? A. Take a short position in the futures contract, borrow yen...
There is a stock index futures contract maturing in one year. The risk-free rate of interest...
There is a stock index futures contract maturing in one year. The risk-free rate of interest for borrowing is 4.7% per annum with annualized compounding, and the corresponding risk-free rate for lending is 0.3% per annum lower. Assume that you can reinvest all dividends received up to futures maturity and thereby receive 1.2 index points at futures maturity. The current level of the stock index is 3,385 index points. The bid-ask spread involved in trading the index basket of stocks...
There is a stock index futures contract maturing in one year. The risk-free rate of interest...
There is a stock index futures contract maturing in one year. The risk-free rate of interest for borrowing is 3.5% per annum, and the corresponding risk-free rate for lending is 0.6% per annum lower. Assume that you can reinvest all dividends received up to futures maturity and thereby receive 1.4 index points at futures maturity. The current level of the stock index is 3,674 index points. The bid-ask spread involved in trading the index basket of stocks is 2 index...
There is a stock index futures contract maturing in one year. The risk-free rate of interest...
There is a stock index futures contract maturing in one year. The risk-free rate of interest for borrowing is 3.4% per annum, and the corresponding risk-free rate for lending is 0.8% per annum lower. Assume that you can reinvest all dividends received up to futures maturity and thereby receive 1.3 index points at futures maturity. The current level of the stock index is 1,383 index points. The bid-ask spread involved in trading the index basket of stocks is 4 index...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT