Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

ABC common stock has a price of $100 and is expected to pay a dividend of $1 per share in 2 months and 5 months.

ABC common stock has a price of $100 and is expected to pay a dividend of $1 per share in 2 months and 5 months.

The S&P 500 stock index is 3,916. The dividend yield on the index is 2% on a continuously compounded basis.

The risk free interest rate in Switzerland is 3% per annum with continuous compounding and the spot price of the Swiss franc is $1.0641.

A futures contract on ABC stock has a time to the delivery date of 6 months, a delivery price of $100 and a size of 1000 shares.

A futures contract on the S&P 500 stock index has a delivery date in 9 months, a delivery price of 3,800, and a size of 250 times the index.

A futures contract on the Swiss franc has a delivery date of 12 months, a delivery price of $1.0851 and a size of 62,500 Swiss francs.

All prices are in U. S. dollars. The U. S. dollar risk free rate is 5% continuously compounded.

Consider the following statements.

Statement I. The value of a long position in one futures contract on ABC stock is (close to) $500.

Statement II. The value of a short position in one futures contract on the S&P500 stock index is (close to) $49,390.

Statement III. The value of a long position in 5 futures contracts on Swiss francs is (close to) $156.25.

Which of the following is correct?

  1. Statements II and III are correct, Statement I is incorrect.

  2. Statements I and III are correct, Statement II is incorrect.

  3. Statement III is correct, Statements I and II are incorrect.

  4. Statements I and II are correct, Statement III is incorrect.

  5. Statement I is correct, Statements II and III are incorrect.

  6. Statement II is correct, Statements I and III are incorrect.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Public Finance A Contemporary Application Of Theory To Policy

Authors: David N. Hyman

6th Edition

0030213088, 9780030213083

More Books

Students also viewed these Finance questions