Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

On November 8 2023, the S&P 500 index is at 1,300, the continuously compounded dividend yield is 3% p.a, and the continuously compounded risk-free rate

On November 8 2023, the S&P 500 index is at 1,300, the continuously compounded dividend yield is 3% p.a, and the continuously compounded risk-free rate is 5.2% p.a.

Assume the transaction cost is zero.

a) What is the theoretical futures price for a December contract that expires on 18th

December 2023?

b) If on November 8 2023, the futures contract is priced at 1,320, is there any arbitrage opportunity? If yes, show the overall profit from this opportunity assuming that the arbitrage transaction will be executed by borrowing $20 million, the multiplier of S&P is 250, and the S&P index stood at 1340 on December18.

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

Venture capital and the finance of innovation

Authors: Andrew Metrick

2nd Edition

9781118137888, 470454709, 1118137884, 978-0470454701

More Books

Students also viewed these Finance questions

Question

LO22.5 List the main elements of existing federal farm policy.

Answered: 1 week ago

Question

What is Aufbau's rule explain with example?

Answered: 1 week ago

Question

What would the Prime Minister suggest? Explore

Answered: 1 week ago

Question

Does it meet the criteria set in the Challenge stage?

Answered: 1 week ago

Question

What would the person you least admire do?

Answered: 1 week ago