a
To compute: The expected level of the Index in one year when the expected
Introduction:
Arbitrage pricing theory: It is one of the multi-factor asset pricing models. It states that the
b
To compute: The theoretical no-arbitrage price for 1-year future contract on the S&P 500 stock index.
Introduction:
No-arbitrage price: No-arbitrage can also be called as arbitrage- free principle. According to this principle, the price of the derivative is fixed in such a way that no one involved in trading can make a risk-free profit by purchasing one and selling the other.
c
To evaluate: The existence of arbitrage opportunity and how to use it when the actual future price is 2012.
Introduction:
Arbitrage opportunity: It is an opportunity which can be availed to make a risk-free profit even in market fluctuations. The process of arbitrage involves buying of an asset in one market with a lesser price and sell it another market with a higher price.
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- A stock is trading at $80 per share. The stock is expected to have a yearend dividend of $4 per share (D1 = $4), and it is expected to grow at some constant rate, g, throughout time. The stock’s required rate of return is 14% (assume the market is in equilibrium with the required return equal to the expected return). What is your forecast of gL?arrow_forwardSuppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for 1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years for a price of 1,050. (1) What is the bonds nominal yield to call (YTC)? (2) If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?arrow_forwardThe level of the Syldavia market index is 21,900 at the start of the year and 26,400 at the end. The dividend yield on the index is 4.7%. What is the return on the index over the year? If the interest rate is 6%, what is the risk premium over the year? If the inflation rate is 8%, what is the real return on the index over the year? Note: For all requirements, do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places.arrow_forward
- Consider a European call option on the S&P 500 that is two months from maturity. The currentvalue of the index is 930, the exercise price is 900, the risk-free interest rate is 8% per annum,and the volatility of the index is 20% per annum. Dividend yields of 0.2% and 0.3% are expectedin the first month and the second month, respectively. Calculate the call pricearrow_forwardThe level of the Syldavian market index is 23,000 at the start of the year and 27,500 at the end. The dividend yield on the index is 5.5%. What is the return on the index over the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) If the interest rate is 8%, what is the risk premium over the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) If the inflation rate is 9%, what is the real return on the index over the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)arrow_forwardThe level of the Syldavian market index is 21,100 at the start of the year and 25,600 at the end. The dividend yield on the index is 4.3%. a. What is the return on the index over the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. If the interest rate is 7%, what is the risk premium over the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. If the inflation rate is 9%, what is the real return on the index over the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT