Question
In January 2015, you observe the following: The spot S&P 500 price is currently $2,050. The stocks in the S&P 500 will pay 1% dividends
In January 2015, you observe the following:
The spot S&P 500 price is currently $2,050.
The stocks in the S&P 500 will pay 1% dividends from now until March 2015.
The riskless interest rate from now until March 2015 is 0.3% (0.003).
There exist futures contracts with a price of $2,030. Each contract calls for delivery of 250 "baskets"
of the stocks in the S&P 500 in March 2015.
A.Suppose that you are the manager of a mutual fund that is indexed to the S&P 500 index (whichmeans that it currently own the S&P 500 shares the shares of the stocks that are in the S&P 500index). The current market value of fund's equity is $41,000,000. Is there an investment strategythat willALWAYSbeat the return on the S&P 500 in the spot market? If yes, design the strategyand calculate the profits.
B. Lets check if your strategy above performs as you claim:Calculate the total dollar return on your strategy and on a strategy of keeping the shares in the spotmarket when the spot S&P 500 price on the futures delivery day is $2,500?Calculate the total dollar return on your strategy and on a strategy of keeping the shares in the spotmarket when the spot S&P 500 price on the futures delivery day is $1,800?
EXPLAIN.
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