Question

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?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Given information,

Current spot price of the stock = $29

Dividend expected in two months = $0.38

To eliminate the possibility of arbitrage the actual Futures contract should be priced at theoretical price of Futures

So we need to findout the theoretical futures price which can be done by multiplying the Present value of spot price with continuous compounding factor

Present value of Spot price = $29 - ( $0.38/e^3.4%)= $28.63

Theoretical Futures price = $28.63*(e^6.96%)= $30.694 ~ $30.7

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
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. A British pound futures contract expires in 12 months. The...
You have the following market data. A British pound futures contract expires in 12 months. The annualized, continuously compounded risk-free interest rates in Britain and the U.S. are 1.55% and 1.01%, respectively, from today until expiration. The spot exchange rate between the British pound and the U.S. dollar is $1.645 per British pound. What is the no-arbitrage futures price (expressed in U.S. dollars)? Do not round values at intermediate steps in your calculations. Enter your answer in dollars and cents...
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
The spot price of light, sweet crude oil is $96.24 per bbl., and the futures price...
The spot price of light, sweet crude oil is $96.24 per bbl., and the futures price of the NYMEX March light, sweet crude oil futures contract is $96.37 per bbl. This contract expires in 4 months. The continuously compounded 4-month risk-free rate is 2.56% per year. The storage cost is $1.22 per barrel for 4 months, payable in advance. What is the arbitrage profit per 1,000 bbl.? Ignore transactions costs.
Now suppose Stock A is dividend-paying, with $1 dividend paid for each 3 months. The spot...
Now suppose Stock A is dividend-paying, with $1 dividend paid for each 3 months. The spot price of a Stock A is $5, and the risk-free rate of interest is 8% per annum with continuous compounding. (d) What are the main differences between forwards and futures? (e) What are the forward price and the initial value of a one-year forward contract on one share of Stock A? (f) Four months later, the price of the stock is $6 and the...
A $48 stock pays a dividend of $1.20 every 6 months, with the first dividend coming...
A $48 stock pays a dividend of $1.20 every 6 months, with the first dividend coming 6 months from today. The continuously compounded risk-free rate is 9%. What is the price of a forward contract that expires 1 year from today, immediately after the second dividend? a. $49.57 b. $51.32 c. $50.07 d. $45.76 e. $49.89
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...
A $50 each pays $1 dividend every 3 months, with the first dividend coming 3 months...
A $50 each pays $1 dividend every 3 months, with the first dividend coming 3 months from today. The continuously compounded risk-free rate is 6%. a. What is the price of a prepaid forward contract that expires 1 year from today, immediately after the fourth-quarter dividend? b. What is the price of a forward contract that expires at the same time?
A stock price is $60 today. It pays dividend of $1 after two months and $1.05...
A stock price is $60 today. It pays dividend of $1 after two months and $1.05 after five months. The continuously compounded interest rate is 2% per year. Transaction costs are $0.10 per stock traded, a $0.25 one-time fee for trading forward contracts, and no costs for saving or borrowing. If the six-month forward price is $61, demonstrate how to make arbitrage profits or explain why you cannot.
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.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT