1) Assume that one share of the S&P 500 Index can be purchased for 4,100 and that the dividend yield is 2.75% over the holding period and the risk-free rate is 3.20% over the holding period. What should the contract price on a one-year S&P 500 futures be?

2) Imagine you want to put on a short hedge by purchasing the S&P 500 at 4100 (from problem 1), and shorting the futures at 4200. If at the expiration date, the futures contract is valued at 4250, what is the: a. Net Futures Profit b. Net Index Profit c. Dividend d. Net Profit e. What must the risk-free rate be in order to eliminate an arbitrage opportunity?

3) Imagine that you can borrow or lend at a risk-free rate of 3.20% in the US, and you can borrow or lend at a risk-free rate of 4.55% in Europe. You have $500,000 to invest for one-year. The exchange rate is: 1.0000 USD = 0.9372 EUR.

a. Is there a covered interest arbitrage opportunity?

b. If so, how much (in USD) can you profit?

c. Explain what you would do to exploit a mispricing.

d. What would the one-year futures contract FX rate have to be (approximate out to 4 decimals) to eliminate the arbitrage opportunity?

Answer rating: 100% (QA)

1 To determine the contract price on a oneyear SP 500 futures we need to consider the cost of carry The cost of carry incorporates the dividend yield and the riskfree rate The formula for the futures ... View the full answer