There is a stock index futures contract maturing in one year. The risk-free rate of interest for
Question:
There is a stock index futures contract maturing in one year. The risk-free rate of interest for borrowing is 3.4% per annum, and the corresponding risk-free rate for lending is 0.7% per annum lower. Assume that you can reinvest all dividends received up to futures maturity and thereby receive 1.1 index points at futures maturity. The current level of the stock index is 2,174 index points. The bid-ask spread involved in trading the index basket of stocks is 9 index points, and, in case there is short-selling involved, there are additional 5 index points stock borrowing fees payable when the stock is returned to the lender at maturity. Finally, round-trip commissions in the futures market are 6 index points and payable at the start. There are no other transactions costs involved in arbitrage. What is the width of the no-arbitrage window? Use one decimal place for your answer. 41.9 is the answer. Explain how to solve?
Introduction to Derivatives and Risk Management
ISBN: 978-1305104969
10th edition
Authors: Don M. Chance