a.
To compute: The transaction cost per dollar of stock controlled by the future contract supposing that the value of the S&P 500 stock index is 2000.
Introduction:
Transactions costs: When some trading is done, there is a 100% chance of incurring some expenses. The payment of these expenses can be termed as transaction cost. In terms of Finance, the expense such as broker’s commission is considered as one of the transaction costs.
b.
To compute: The transaction cost per ‘typical share’ controlled by the future contract when the average price of a share on the NYSE is about $40.
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.
c.
To compute: The number of times the transactions costs willoccur in future markets.
Introduction:
Future market: It can also be called as ‘futures exchange’. A future market is supposed to be a listed auctioned market where the traders purchase or sell various securities and other types of future contracts to be delivered on a future date specified in advance.
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- Suppose you purchase 20 call contracts on SAMSONG Co. stock. The strike price is $120, and the premium is $8. If the stock is selling for $140, $128, $120 per share at expiration, what are your call options worth? What is your net profit?arrow_forwardThe S&P 500 spot price is $4,570. The futures price with 6-months delivery is $4,895. The risk-less rate of return for 6-months is 3.68%. You enter into ONE futures contract to deliver ONE index portfolio in 6-months and receive $4,895. Whatever profit you make, you transfer to today. How much $ profit will you have today? Hint: Borrowing money today and selling risk-less bonds are equivalent actions. Whatever $ profit you may make from the above transactions, you have to bring back to today by borrowing at the risk-less rate. Assume no transactions costs (you can borrow and lend at the risk-less rate etc.).arrow_forwardOn a particular day, the September S&P 500 stock index futures was priced at 960.50. The S&P 500 index was at 956.49. The contract expires 73 days later. Assuming continuous compounding, suppose the risk-free rate is 5.96 percent and the dividend yield on the index is 2.75 percent. Is the futures overpriced or underpriced? Assuming annual compounding, suppose the risk-free rate is 5.96 percent and the future value of dividends on the index is $5.27. Is the futures overpriced or underpriced?arrow_forward
- Suppose that JPMorgan Chase sells call options on $2.40 million worth of a stock portfolio with beta = 1.50. The option delta is 0.55. It wishes to hedge its resultant exposure to a market advance by buying a market-index portfolio. Suppose it use market index puts to hedge its exposure. The index at current prices represents $2,000 worth of stock and the contract multiplier is 400. Required: How many dollars’ worth of the market-index portfolio should it purchase? What is the delta of a put option? Complete the following:arrow_forwardThe value of the S&P 500 index is 4,815. The continuously compounded risk - free rate is 5.5% and the continuous dividend yield is 1.1% . You consider trading 1 E- mini futures on the S&P 500 (symbol: ES) with a contract unit of $5 x S&P 500 Index listed on CME and 115- days to expiration. a. Calculate the no - arbitrage futures price of the position. b. Calculate the value of a long futures position after 46 days if the index value is $3,852.arrow_forwardSuppose the 1-year futures price on a stock-index portfolio is 1,914, the stock index currently is 1,900, the 1-year risk-free interest rate is 3%, and the year-end dividend that will be paid on a $1,900 investment in the market index portfolio is $40.a. By how much is the contract mispriced?b. Formulate a zero-net-investment arbitrage portfolio and show that you can lock in riskless profits equal to the futures mispricing.c. Now assume (as is true for small investors) that if you short sell the stocks in the market index, the proceeds of the short sale are kept with the broker, and you do not receive any interest income on the funds. Is there still an arbitrage opportunity (assuming that you don’t already own the shares in the index)? Explain.d. Given the short-sale rules, what is the no-arbitrage band for the stock-futures price relation-ship? That is, given a stock index of 1,900, how high and how low can the futures price be without giving rise to arbitrage opportunities?arrow_forward
- You expect the stock market to increase, but instead of acquiring stock, you decide to acquire a stock index futures contract. That index is currently 60.4, and the contract has a value that is $500 times the amount of the index. The margin requirement is $2,500. When you make the contract, how much must you put up? Round your answer to the nearest dollar. $ What is the value of the contract based on the index? Round your answer to the nearest dollar. $ If the value of the index rises 2 percent to 61.608, what is the profit on the investment? Round your answer to the nearest cent. $ What is the percentage earned on the funds you put up? Round your answer to one decimal place. % If the value of the index declines 2 percent to 59.192, what percentage of your funds will you lose? Round your answer to one decimal place. Enter your answer as a positive value. % What is the percentage you earn (or lose) if the index falls to 55.4? Round your answer to one decimal place. Enter…arrow_forwardOneChicago has just introduced a single-stock futures contract on Brandex stock, a company that currently pays no dividends. Each contract calls for delivery of 1,000 shares of stock in 1 year. The T-bill rate is 6% per year.a. If Brandex stock now sells at $120 per share, what should the futures price be?b. If the Brandex price drops by 3%, what will be the change in the futures price and the change in the investor’s margin account?c. If the margin on the contract is $12,000, what is the percentage return on the investor’s position?arrow_forwardSuppose that the risk-free interest rate is 6% per annum with continuous compounding and the dividend yield on a stock index is 4% per annum. The index is standing at 400 and the futures price for a contract (on that index) deliverable in 9 months is 405. What arbitrage opportunity does this create? • Borrow to buy shares underlying the index and enter a short position in index futures contracts • Enter a long position in index futures contracts, short sell shares underlying the index and invest excess funds • Borrow to buy shares underlying the index and enter a long position in index futures contracts • Enter a short position in index futures contracts, short sell shares underlying the index and invest excess funds • No arbitrage opportunityarrow_forward
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