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The current level of the S&P 500 is 3000. The dividend yield on the S&P 500...

The current level of the S&P 500 is 3000. The dividend yield on the S&P 500 is 2%. The risk-free interest rate is 3%. What should be the fair price of a one-year maturity futures contract?


- Now assume that the futures contract is also traded for 3000. Is contract over or underpriced?

- Construct arbitrage portfolio for taking advantage of such price deviation. (refer to Chapter 17 slides and our in class work posted on Canvas)

- Discuss whether such parity should also hold for Crude Oil futures. What considerations are involved for their arbitrage pricing?

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Answer #1

Spot price is 3000

Interest rate is 3%

Dividend yield is 2%

Fair value of futures is = se^(r-d)

Where s is spot price

e is mathmatical constant

r is rate and d is dividend yield

F=3000×e^(0.03-0.02)

= 3000×(2.718)^0.01 = 3030.15

2) if market price is 3000 then futures is undervalued hence arbitrage exists

And that is long futures market sell underlying asset and lend money

C) in case of commodities there will be no dividend yiled and there is storage costs and covinience yield

yes this parity applys for commodities also but after considering storage costs and convenience yield

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