15. Suppose the S&R index is 800, and that the dividend yield is 0. You are an arbitrageur with a continuously compounded borrowing rate of 5.5% and a continuously compounded lending rate of 5%. Assume that there is 1 year to maturity.

a. Supposing that there are no transaction fees, show that a cash-and-carry arbitrage is not profitable if the forward price is less than 845.23, and that a reverse cash-and-carry arbitrage is not profitable if the forward price is greater than 841.02.

b. Now suppose that there is a $1 transaction fee, paid at time 0, for going either long or short the forward contract. Showthat the upper and lower no-arbitrage bounds now become 846.29 and 839.97.

c. Now suppose that in addition to the fee for the forward contract, there is also a $2.40 fee for buying or selling the index. Suppose the contract is settled by delivery of the index, so that this fee is paid only at time 0. What are the new upper and lower no-arbitrage bounds?

d. Make the same assumptions as in the previous part, except assume that the contract is cash-settled. This means that it is necessary to pay the stock index transaction fee (but not the forward fee) at both times 0 and 1. What are the new no-arbitrage bounds?

e. Now suppose that transactions in the index have a fee of 0.3% of the value of the index (this is for both purchases and sales). Transactions in the forward contract still have a fixed fee of $1 per unit of the index at time 0. Suppose the contract is cash-settled so that when you do a cash-and-carry or reverse cashand-

carry you pay the index transaction fee both at time 1 and time 0. What are the new upper and lower no-arbitrage bounds? Compare your answer to that in the previous part. (Hint: To handle the time 1 transaction fee, you may want to consider tailing the stock position.)