Company XYZs stock price is $50 per share in the spot market and its 3-month futures price is $50.50. The stock pays a 3% annual dividend (paid quarterly). a) If there are no arbitrage opportunities between the spot and futures price, what must be the cost of financing the purchase of XYZ stock (at an annual rate)?

Suppose you dont own XYZ stock, and you think that its stock price will decline over the next three months. b) What transaction would you do in the spot market, and how many shares would be involved in that transaction if you had $100,000 available to post in cash?

c) What will be your profit (or loss) if the stock price rises to $55 and will there be a margin call? d) Alternatively, what transaction would you do in the futures market, and what would be your profit (or loss) on the same number of shares as in part b if the stock price rises to $55 in three months?

Question

Company XYZs stock price is $50 per share in the spot market and its 3-month futures price is $50.50. The stock pays a 3% annual dividend (paid quarterly). a) If there are no arbitrage opportunities between the spot and futures price, what must be the cost of financing the purchase of XYZ stock (at an annual rate)?

Suppose you dont own XYZ stock, and you think that its stock price will decline over the next three months. b) What transaction would you do in the spot market, and how many shares would be involved in that transaction if you had $100,000 available to post in cash?

c) What will be your profit (or loss) if the stock price rises to $55 and will there be a margin call? d) Alternatively, what transaction would you do in the futures market, and what would be your profit (or loss) on the same number of shares as in part b if the stock price rises to $55 in three months?

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