You own a large position in a relatively illiquid bond that you want to sell. b. You have a large gain on one of your Treasuries and want to sell it, but you would like to defer the gain until the next tax year. c. You will receive your annual bonus next month that you hope to invest in long-term corporate bonds. You believe that bonds today are selling at quite attractive yields, and you are concerned that bond prices will rise over the next few weeks.
1) How might a
a. You own a large position in a relatively illiquid bond that you want to sell.
b. You have a large gain on one of your Treasuries and want to sell it, but you would like to defer the gain until the next tax year.
c. You will receive your annual bonus next month that you hope to invest in long-term corporate bonds. You believe that bonds today are selling at quite attractive yields, and you are concerned that
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2) The S&P portfolio pays a dividend yield of 1% annually. Its current value is 1,300. The T-bill rate is 4%. Suppose the S&P futures price for delivery in 1 year is 1,330. I know that the value of future contract is $1,339, which is priced at $1,330, the contract is under priced by $9. Because,
Value of future contract = Current Value x (1 + Risk free rate – Dividend Yield)
= $1,300 x (1 + 0.04 – 0.01) = $1,339
Now, Construct an arbitrage strategy to exploit the mispricing and show that your profits 1 year hence will equal the mispricing in the futures market
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