Consider these futures market data for the June delivery S&P 500 contract, exactly 6 months hence. The

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Consider these futures market data for the June delivery S&P 500 contract, exactly 6 months hence. The S&P 500 index is at 1,350, and the June maturity contract is at F0 = 1,351.

a. If the current interest rate is 2.2% semiannually, and the average dividend rate of the stocks in the index is 1.2% semiannually, what fraction of the proceeds of stock short sales would need to be available to you to earn arbitrage profits?

b. Suppose that you in fact have access to 90% of the proceeds from a short sale. What is the lower bound on the futures price that rules out arbitrage opportunities? By how much does the actual futures price fall below the no-arbitrage bound? Formulate the appropriate arbitrage strategy, and calculate the profits to that strategy.


Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing...
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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Investments

ISBN: 9780073530703

9th Edition

Authors: Zvi Bodie, Alex Kane, Alan J. Marcus

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