INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 22, Problem 16PS
Summary Introduction
To compute: The arbitrage strategy required to exploit the mispricing in future market. Supposing that S&P futures price for delivery in 1 year is 2,050, current value is 2,000, T-bill rate is 4%.
Introduction:
Arbitrage: Arbitrage can be termed as that transaction done through which there is a chance of two assets producing the same results but may sell at different prices. Arbitrage is important due to the fact the when there is a huge purchase of assets which are cheaper, its price will increase. On the other hand, when an asset is sold at a high price, its price will decrease.
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The S&P portfolio pays a dividend yield of 1% annually. Its current value is 2,000. The T-bill rate is 4%. Suppose the S&P futures price for delivery in 1 year is 2,050. Construct an arbitrage strategy to exploit the mispricing and show that your profits 1 year hence will equal the mispricing in the futures market.
The S&P portfolio pays a dividend yield of 1% annually. Its current value is 1,300. The T-billrate is 4%. Suppose the S&P futures price for delivery in 1 year is 1,330. Construct an arbitragestrategy to exploit the mispricing and show that your profits 1 year hence will equal the mispricing in the futures market.
You observe that the settlement price of a one-year futures contract for 1 share of a dividend paying stock is currently at $52. The current stock price is $50 and the risk-free interest rate is 10% p.a. (compounded annually). It is also known that the dividend yield on the stock is 4% p.a. (compounded annually). Set up a strategy to realize an arbitrage profit today and show the initial and terminal cash flows from each position taken in the strategy. Assume that investors can short-sell or buy the stock on margin and that they can borrow and lend at the risk-free rate.
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Chapter 22 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
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