In July 2004, six-month futures on the FTSE 500 stock index traded at 16,000. The spot was 13,300. The interest rate was 19% p.a. and the dividend yield was 4% (for six months). Assume that the entire dividend is paid on contract maturity, and the contract concerns the ex-dividend price. Are the futures are fairly priced? If not, illustrate an arbitrage strategy to take advan- tage of this opportunity.

In July 2004, six-month futures on the FTSE 500 stock index traded at 16,000. The spot was 13,300. The interest rate was 19% p.a. and the dividend yield was 4% (for six months). Assume that the entire dividend is paid on contract maturity, and the contract concerns the ex-dividend price. Are the futures are fairly priced? If not, illustrate an arbitrage strategy to take advan- tage of this opportunity.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 13P

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