A3) Finance Suppose that the risk-free interest rate is 10% per annum with continuous compounding and that the dividend yield on a stock index is 4% per annum. The index is standing at 400, and the futures price for a contract deliverable in four months is 405. What arbitrage opportunities does this create?

A3) Finance Suppose that the risk-free interest rate is 10% per annum with continuous compounding and that the dividend yield on a stock index is 4% per annum. The index is standing at 400, and the futures price for a contract deliverable in four months is 405. What arbitrage opportunities does this create?

Name: A3) FinanceSuppose that the risk-free interest rate is 10% per annum w
Uploaded: 2024-03-20T06:51:32.000Z
Channel: Bartleby
Description: A3) FinanceSuppose that the risk-free interest rate is 10% per annum with continuous compounding and that the dividend yield on a stock index is 4% per annum. The index is standing at 400, and the futures price for a contract deliverable in four mont

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter8: Risk And Rates Of Return

Section: Chapter Questions

Problem 8PROB

See similar textbooks

Similar questions

A stock is trading at $80 per share. The stock is expected to have a yearend dividend of $4 per share (D1 = $4), and it is expected to grow at some constant rate, g, throughout time. The stock’s required rate of return is 14% (assume the market is in equilibrium with the required return equal to the expected return). What is your forecast of gL?
Crisp Cookware’s common stock is expected to pay a dividend of $3 a share at the end of this year (D1 = $3.00); its beta is 0.8. The risk-free rate is 5.2%, and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $40 a share. Assuming the market is in equilibrium, what does the market believe will be the stock’s price at the end of 3 years (i.e., what is )?
Suppose that the risk-free interest rate is 6% per annum with continuous compounding and that the dividend yield on a stock index is 4% per annum. The index is standing at 400, and the futures price for a contract deliverable in four months is 405. What arbitrage opportunities does this create?
Suppose that the risk-free interest rate is 6% per annum with continuous compounding and the dividend yield on a stock index is 4% per annum. The index is standing at 400 and the futures price for a contract (on that index) deliverable in 9 months is 405. What arbitrage opportunity does this create? • Borrow to buy shares underlying the index and enter a short position in index futures contracts • Enter a long position in index futures contracts, short sell shares underlying the index and invest excess funds • Borrow to buy shares underlying the index and enter a long position in index futures contracts • Enter a short position in index futures contracts, short sell shares underlying the index and invest excess funds • No arbitrage opportunity
Stewart Industries expects to pay a $3.00 per share dividend on its common stock at the end of the year (i.e. D1 = $3.00). The dividend is expected to grow 25 percent a year until t = 3, after which time the dividend is expected to grow at a constant rate of 5 percent a year (i.e. D3 = $4.6875 and D4 = $4.9219). The stock’s beta is 1.2, the risk-free rate of interest is 6 percent, and the market risk premium (i.e., rm –rrf) is 5 percent. What is the company’s current stock price?
Assume that the dividend payout ratio will be 75 percent when the rate on long-term government bonds falls to 8 percent. Because investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 15 percent return. The return on equity will be 12 percent. To what price will the market rise if the earnings expectation is $32.00?
a) Calculate the rate of capital gain or loss on a ten-year zero coupon bond which the interest rate has increased from 12% to 15%. The bond has a face value of Tshs. 1,000,000.00 b) A manager of a financial institution is holding 35% of a portfolio in a bond with a five year duration and 65% in a bond with a ten-year duration. What is the duration of the portfolio? c) Briefly explain the factors affecting interest rate risks of a firm
suppose that you enter into a six-month forward contract on a non-dividend paying stock when the stock price is $30 and the risk-free interest rate(with continuous compounding) is 12% per annum. what is the forward price? a) $30.89 b) $31.86 c) $34.56 d) $32.15
The ABC stock currently stands at 5000 and has a volatility of 20% per annum. The risk-free rate of interest is 4.25% per annum and the stock provides a dividend yield of 2.5% per annum, both with continuous compounding. Using the Black‐Scholes model, calculate the value of six-month European call and put with an exercise price of $4900.