Assume that asset A has no storage cost and there is a convenience yield. Every 9...

 

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Assume that asset A has no storage cost and there is a convenience yield. Every 9 months, the holder of the asset receives 5% of the asset value as a payment (you can call that a dividend). Suppose that someone is willing to enter a forward contract of Asset A for delivery in one year from now at F0,1 = $115 a. Suppose that in 9 months, the price of the asset is P9. How much money does one receive at t=9 12 months from holding the asset? Assume you have N shares. b. If you spend the dividend to buy more of asset A, how many more units of A can you buy (assume you can buy fractions of the asset) We don't know a priori if there is a mispricing. Compute an arbitrage portfolio to exploit the potential mispricing. Hint: start by borrowing today to buy units of asset A and reinvest the dividend to buy more of A to get one unit at t=1 year. C. $100 1+5% Assume that asset A has no storage cost and there is a convenience yield. Every 9 months, the holder of the asset receives 5% of the asset value as a payment (you can call that a dividend). Suppose that someone is willing to enter a forward contract of Asset A for delivery in one year from now at F0,1 = $115 a. Suppose that in 9 months, the price of the asset is P9. How much money does one receive at t=9 12 months from holding the asset? Assume you have N shares. b. If you spend the dividend to buy more of asset A, how many more units of A can you buy (assume you can buy fractions of the asset) We don't know a priori if there is a mispricing. Compute an arbitrage portfolio to exploit the potential mispricing. Hint: start by borrowing today to buy units of asset A and reinvest the dividend to buy more of A to get one unit at t=1 year. C. $100 1+5%

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a If the price of the asset in 9 months is P9 and you hold N shares then you will recei... View the full answer