On July 5, a stock index futures contract with expiration on December 20 settles at 357.24. On the same day, the spot index closes at 361.54. Assume that each index point is worth $1. The risk-free rate of interest is 1.5% per annum and the dividend yield on the spot index is 3.5% per annum (both rates are continuously compounded). Transaction costs are negligible. Then: One cannot tell if there is an arbitrage opportunity or not, as we don't know what the spot price of the index will be at the expiration of the futures contract Go long the futures, short the spot, invest the proceeds and realize an arbitrage profit of $4.30 Go long the futures, short the spot, invest the proceeds and realize an arbitrage profit of $1.00 O Go short the futures, borrow to long the spot and realize an arbitrage profit of $1.00 O The futures and the spot are fairly priced and, hence, there is no arbitrage opportunity
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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