Question
a) The current price of a non-dividend-paying stock is $30 and the stock is expected to pay a dividend of $0.5 in one months' time
a) The current price of a non-dividend-paying stock is $30 and the stock is expected to pay a dividend of $0.5 in one months' time and then 0.5 again in four months' time. The risk-free rate of return is 6.00% p.a. (Continuously compounded). If the price on a six-month forward contract is F0,0.5=28, is there an arbitrage opportunity? If arbitrage is possible, design a strategy to take advantage of it. What is the arbitrage profit earned from this strategy?
b) An Australia fund manager is expecting a rising stock market over the next 6 months and wants to gain an increased exposure to this trend. Their portfolio currently valued at $50.000.000 has a beta of 0.8. How many S&P200 futures contracts (with nominal value of F0,t x $25 each where F0,t = 4,000) does the fund have to transact in to increase the beta of the portfolio to 1.4? should the fund take a long or short position in these contracts? Why would the fund manager fail to get the target beta by simply investing additional money into the S&P200 stocks?
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