Question

Suppose that the risk-free interest rate is 8% per annum with continuous compounding. The dividend yield...

Suppose that the risk-free interest rate is 8% per annum with continuous compounding. The dividend yield on a stock is 3.5% per annum. The stock currently is selling at $255.17 and the futures price for a contract deliverable in five months is $270.

a. Is there an arbitrage opportunity?

(sample answer: yes; or no)

b. If there is an arbitrage opportunity, then will you long futures or short futures?

(sample answer: Long; or Short)

c. What is the arbitrage profit per share if there is an arbitrage opportunity in today’s dollar (PV of the profit) ignoring the transaction fee?

(sample answer: $1.25)

Homework Answers

Answer #1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose that the risk-free interest rate is 8% per annum with continuous compounding. The dividend yield...
Suppose that the risk-free interest rate is 8% per annum with continuous compounding. The dividend yield on a stock is 3.5% per annum. The stock currently is selling at $255.17 and the futures price for a contract deliverable in five months is $270. a. Is there an arbitrage opportunity? (sample answer: yes; or no) b. If there is an arbitrage opportunity, then will you long futures or short futures? (sample answer: Long; or Short) c. What is the arbitrage profit...
Suppose that the risk-free interest rate is 8% per annum with continuous compounding. The dividend yield...
Suppose that the risk-free interest rate is 8% per annum with continuous compounding. The dividend yield on a stock is 3.5% per annum. The stock currently is selling at $255.17 and the futures price for a contract deliverable in five months is $270. a.        Is there an arbitrage opportunity? (sample answer: yes; or no) b.       If there is an arbitrage opportunity, then will you long futures or short futures? (sample answer: Long; or Short) c.        What is the arbitrage profit per share if...
Suppose that the risk-free interest rate term structure is flat 4% per annum with continuous compounding...
Suppose that the risk-free interest rate term structure is flat 4% per annum with continuous compounding and that the dividend yield on a stock index is 1% per annum. The index is standing at 9,200, and the futures price for a contract deliverable in eight months is 8,900. Required: a)      Today, what is the theoretical future price “F”? b)      Today, what arbitrage opportunities does this create? Explain actions to carry it out and calculate the profit. c)      Today, we enter into the future...
The risk-free rate of interest for borrowing is 4.2% per annum with continuous compounding, and the...
The risk-free rate of interest for borrowing is 4.2% per annum with continuous compounding, and the corresponding risk-free rate for lending is 0.7% per annum lower. The dividend yield is 0.4% per annum. The current value of a stock index is 1,404. There are no other transactions costs involved in spot-futures arbitrage. What is the width of the no-arbitrage window of a futures contract with six months to maturity? Use one decimal place for your answer. Answer = 5
The risk-free rate of interest for borrowing is 3.2% per annum with continuous compounding, and the...
The risk-free rate of interest for borrowing is 3.2% per annum with continuous compounding, and the corresponding risk-free rate for lending is 1% per annum lower. The dividend yield is 0.6% per annum. The current value of a stock index is 1,417. There are no other transaction costs involved in arbitrage. What is the highest six-month futures price that will preclude arbitrage? The answer is 1435.5. How do you solve this?
The risk-free rate of interest for borrowing is 3.8% per annum with continuous compounding, and the...
The risk-free rate of interest for borrowing is 3.8% per annum with continuous compounding, and the corresponding risk-free rate for lending is 1% per annum lower. The dividend yield is 1.0% per annum. The current value of a stock index is 1,084. There are no other transaction costs involved in arbitrage. What is the highest six-month futures price that will preclude arbitrage? Use one decimal place for your answer. The last expert said this question needs more information, but this...
The price of a non-dividend-paying stock is $35. The risk-free interest rate is 8% based on...
The price of a non-dividend-paying stock is $35. The risk-free interest rate is 8% based on continuous compounding. The price of a European put on the stock is $3. Assume the strike price is $40, and the expiration date is in 5 months. Based on the information above, is there any arbitrage opportunity? And if there is, what profit might a trader capture?
The current price of a dividend-paying stock is $40. The risk-free rate of interest is 2.0%...
The current price of a dividend-paying stock is $40. The risk-free rate of interest is 2.0% per annum with continuous compounding. The stock is supposed to pay dividends in six months from now. (a) If the dividend amount is known to be $2, then the one-year forward price should be $__________ if there is no arbitrage opportunities. (b) If the dividend amount is known to be 4% of the stock price in six months, then the one-year forward price should...
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 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...