A $15-$month futures contract on an equity index is currently trading at R$3763\mathrm{.}52.$ The underlying index is currently valued at R$3625$ and the continuously compounded risk$-$free rate is $5\%$ per year. Assuming no transaction costs,

a$)$ What continuously$-$compounded dividend yield is implied by the futures contract price $?[3]$

b$)$ A trader on the Johannesburg Stock Exchange believes that the continuouslycompounded dividend yield will be $2\mathrm{.}085\%$ over the next $15$ months.

What is the $15-$month futures contract price induced by the trader belief $?[2\mathrm{.}5]$

c$)$ Based on the trader belief, is there an arbitrage opportunity $?$ If yes, describe the appropriate strategy for the trader to take advantage of this opportunity.

 

Answer rating: 100% (QA)

To answer the questions well use the costofcarry model to determine the continuously compounded dividend yield implied by the futures contract price calculate the futures contract price based on the t... View the full answer