Question

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 and short forward

(c) If you believe the actual dividend yield is 2% p.a., in the arbitrage, how many shares of stock would you long/short when you take 1 forward position at t=0?

Answer #1

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...

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...

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!!

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...

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...

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?

A stock index level is currently 2,000. Its volatility is 25%.
The risk-free rate is 4% per annum (continuously compounded) for
all maturities and the dividend yield on the index is 2%. Using the
Black-Scholes model:
a) Derive the value a 6-month European put option with a strike
price of 2020.
b) Derive the position in the index that is needed today to
hedge a long position in the put option. Assume that the option is
written on 250 times...

Suppose the 6-month risk free spot rate in HKD is 1%
continuously compounded, and the 6-month risk free rate in NZD is
3% continuously compounded. The current exchange rate is 5
HKD/NZD.
a. Suppose again that our usual assumptions hold, i.e., no
constraints or other frictions. Suppose you can enter a forward
contract to buy or sell NZD 1 for HKD 5. Is there an arbitrage? If
yes, describe an arbitrage strategy. If no, briefly explain why
not.
b. Suppose...

11. The spot exchange rate is 110.0JPN/USD and the semiannually
compounded risk-free rate of USD is 5.06%. You observe a exchange
forward with 9-month maturity is 112.9JPN/USD.
a. What risk-free rate of JPN is implied by this forward
price?
b. Suppose you believe the risk-free rate of JPN over the next 9
months will be only 0.5%. What arbitrage would you undertake? c.
Suppose you believe the risk-free rate of JPN will be 3 % over the
next 9 months....

The spot exchange rate is 110.0JPN/USD and the semiannually
compounded risk-free rate of USD is 5.06%. You observe a exchange
forward with 9-month maturity is 112.9JPN/USD.
What risk-free rate of JPN is implied by this forward
price?
Suppose you believe the risk-free rate of JPN over the next 9
months will be only 0.5%. What arbitrage would you undertake?
Suppose you believe the risk-free rate of JPN will be 3 % over
the next 9 months. What arbitrage would you...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 3 minutes ago

asked 19 minutes ago

asked 20 minutes ago

asked 25 minutes ago

asked 25 minutes ago

asked 29 minutes ago

asked 30 minutes ago

asked 41 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago