Question

The S&R index level is 900 at t=0. The dividend yield is 3% p.a. continuously compounded and the risk-free rate is 5% continuously compounded.

(a) What is the theoretical forward price with a maturity of 1 year?

(b) Suppose you observe a forward price with a maturity of 1 year equal to 950. What position do you take in order to earn arbitrage profit?

A. Long stock and short forward

B. Long stock and long forward

C. Short stock and long forward

D. Short stock and short forward

(c) Suppose you observe a forward price with a maturity of 1 year equal to 950. What is your arbitrage profit at t=1?

Answer #1

a). Forward price F_{0} = S_{0}e^(r-d)T

where S_{0} = current price = 900

r = risk-free rate = 5%

d = dividend yield = 3%

T = duration = 1 year

F_{0} = 900*(e^(5%-3%)*1)

= $918.18

b). If the observed forward price is $950 then long stock and short forward (option A)

c). Borrow $900 at 5% for one year. Amount payable after one year will be 900e^(5%*1) = $946.14

Short a forward contract to sell the stock after one year at $950.

After one year, net profit is 950 - 946.14 = $3.86

The S&R index level is 1200 at t=0. The risk-free rate is 6%
continuously compounded. Suppose you observe a forward price with a
maturity of 6 months equal to 1230.
(a) What is the implied dividend yield?
(b) If you believe the actual dividend yield is 2% p.a., what
position do you take in order to earn arbitrage profit?
A. Long stock and short forward
B. Long stock and long forward
C. Short stock and long forward
D. Short stock...

Suppose the S&R index is 1000 and the dividend yield is
zero. The continuously compounded borrowing rate is 5% while the
continuously compounded lending rate is 4.5%. The maturity of the
forward contract is 6 months.
(a) Suppose when you buy or sell the index, there is a
transaction cost of $1 at t=0. There is also a transaction cost of
$2 if you take a long or short forward position at t=0. There are
no transaction costs on the...

Suppose the S&R index is 1000 and the dividend yield is
zero. The continuously compounded borrowing rate is 5% while the
continuously compounded lending rate is 4.5%. The maturity of the
forward contract is 6 months.
(a) If there are no transaction costs (of buying/selling index
and futures), and the futures price is 1026. Which of the statement
is true?
A. You can do cash-and-carry arbitrage
B. You can do reverse cash-and-carry arbitrage
C. You can do both cash-and-carry and...

The S&R index spot price is 1100, the continuously
compounded interest rate is 5%, and the dividend yield on the index
is 2%. (Round your answers to two digits after the decimal point
when rounding is necessary)
(A)What is the fair forward price for a 6-month forward?
(B)Suppose you observe a 6-month forward price of 1120, and you
decide to perform an arbitrage strategy. Illustrate the
transactions you will undertake and the amount of profit you will
make from this...

The S&R index spot price is 1100, the continuously
compounded risk-free rate is 5%, and the continuous dividend yield
on the index is 2%.
(a) Suppose you observe a 6-month forward price of 1120. What
arbitrage would you undertake?
(b) Suppose you observe a 6-month forward price of 1110. What
arbitrage would you undertake?
*YOU MUST ANSWER WITH DETAILED WORKING!!

9. The S&R index spot price is 1100, the risk-free rate is
5%, and the dividend yield on the index is 0.
a. Suppose you observe a 6 month forward price of 1135. What
arbitrage would you undertake?
b. Suppose you observe a 6 month forward price of 1115. What
arbitrage would you undertake?

The S&P 500 index is currently at $2,500. If we
assume a continuously compounding interest rate of 1% and a
continuously compounding dividend yield of 2%, what will be the
fair forward price for the index at 1-year maturity? Round to
integer.
The S&P 500 index is currently at $2,500. If we
assume a continuously compounding interest rate of 1% and a
continuously compounding dividend yield of 2%, what will be the
fair forward price for the index at 5-year...

A market-maker in stock index forward contracts observes a
one-month forward price of 2,765 on an index.
You are given:
The index spot price is 2,757.
The continuously compounded dividend yield on the index is
1%.
The cost of carry is 2%.
Describe actions the market-maker could take to exploit an
arbitrage opportunity, and calculate the resulting profit (per
index unit) at the end of one month.
Sell observed forward, buy synthetic forward; Profit = 3.40
Sell observed forward, buy...

Suppose our underlying is a stock XYZ. Today (t=0), XYZ is
priced at $1,013. The storage and insurance cost is $19, paid in
advance. The forward contract uses XYZ as the underlying, which
will expire in one year from today. The interest rate is 0.042. The
forward price at today (t=0) is $1,481.
What is the arbitrage profit that you can make today based on
cost-of-carry model, if you are only allowed to either long or
short one forward contract...

A stock currently sells for $100. A 9-month call option with a
strike of $100 has a premium of $10. Assuming a 5% continuously
compounded risk-free rate and a 3% continuous dividend yield,
(a) What is the price of the otherwise identical put option?
(Leave 2 d.p. for the answer)
(b) If the put premium is $10, what is the strategy for you to
capture the arbitrage profit?
a. Long call, short put, long forward
b. Short call, long put,...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 12 minutes ago

asked 15 minutes ago

asked 17 minutes ago

asked 44 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago