Question
The spot price of an index is 1100, the continuously compounded risk-free rate is 5% per year, and the continuous dividend yield on the index
The spot price of an index is 1100, the continuously compounded risk-free rate is 5%
per year, and the continuous dividend yield on the index is 2%.
[a] Suppose you observe a 6-month forward price of 1120. What arbitrage trades would you under-
take and how much is your profit? Please construct an arbitrage table as part of your analysis.
[b] Suppose you observe a 6-month forward price of 1110. What arbitrage trades would you under-
take and how much is your profit? Please construct an arbitrage table as part of your analysis.
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Answer Arbitrage Strategies for Stock Index with Forward Price Discrepancies Were presented with a scenario involving an index with a spot price of 11...
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Fundamentals of Futures and Options Markets
Authors: John C. Hull
8th edition
978-1292155036, 1292155035, 132993341, 978-0132993340
