EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 23, Problem 1CP
a.
Summary Introduction
To compute: The theoretical price of the future contract which expires after 6 months using the cost-of carry model. Cost of trading future contract is $15.
Introduction:
Future contract: It is supposed to be a legal agreement required to purchase or sell a commodity or asset in the future. This contract will specify the price at which the purchase or sale of the commodity or asset should be done at a specified time which will be agreed by the parties in advance.
b.
Summary Introduction
To calculate:The lower bound of the future contract which expires after 6 months.
Introduction:
Cost-of-carry model: Cost of carrying refers to the net cost of a holding position. This model is used when future contracts are priced. In other words, it is the sum of risk-free interest and storage cost after deducting the dividend yield.
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Donna Doni, CFA, wants to explore potential inefficiencies in the futures market. The TOBEC stock index has a spot value of 185. TOBEC futures contracts are settled in cash and underlying contract values are determined by multiplying $100 times the index value. The current annual risk-free interest rate is 6.0%.a. Calculate the theoretical price of the futures contract expiring six months from now, using the cost-of-carry model. The index pays no dividends.The total (round-trip) transaction cost for trading a futures contract is $15.b. Calculate the lower bound for the price of the futures contract expiring six months from now.
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Chapter 23 Solutions
EBK INVESTMENTS
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