The current value of an index is 585, while three-month futures on the index are quoted at
Question:
The current value of an index is 585, while three-month futures on the index are quoted at 600. Suppose the (continuous) dividend yield on the index is 3% per year.
(a) What is the implied repo rate?
(b) Suppose it is possible for you to borrow at 6% for three months. Does this create any arbitrage openings for you? Why or why not?
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Lets tackle each part of the problem one by one a What is the implied repo rate The repo rate is the rate of return that can be earned by simultaneous...View the full answer
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Jehal Shah
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