Suppose that the S&P 500 (price) index is currently 2700. Further suppose that the price of a one-year S&P500 futures contract is 2781 and the price of a two-year S&P500 futures contract is 2920. (Assume there are no dividends.) 

(a) What are the implied zero-coupon yields for maturities of one and two years?

(b) Suppose that a bank offers you the possibility to enter into a forward contract to either borrow or lend between years 1 and 2 at 4%. Is this consistent with the S&P500 spot and futures prices? 

Could you construct a portfolio that would exploit any inconsistencies?

Answer rating: 100% (QA)

To determine the implied zerocoupon yields for maturities of one and two years we can use the formula Zerocoupon yield Futures price Spot price Spot p... View the full answer