Question
3. S&P 500 index futures are the most popular stock futures contracts in the market. The contract multiplier is $250, which means that the contract
3. S&P 500 index futures are the most popular stock futures contracts in the market. The contract multiplier is $250, which means that the contract size of these derivatives is 250 times the value of the S&P 500 index. (Note that while this multiplier makes the positions too large for many small investors, E-Minis are also available in the market, which are contracts that use the contract multiplier of $125).
Assume that the value of the S&P 500 is 1330 points currently, the risk free rate of interest is 4% annually, and the dividend yield for the index is 2%. The price of a June S&P 500 futures contract for delivery in three months is $336,250.
(a) Is there an arbitrage opportunity? How much money can you make per contract?
(b) What must be the fair price of the December contract?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started