Explain the difference between the concept of illiquidity and the notion of liquidity risks. (b) Based...

  

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Explain the difference between the concept of illiquidity and the notion of liquidity risks. (b) Based on the information from the single stock futures market, A.J calcu- lates that the securities lending rate on BAC is 15% p.a. This high lending rate appears puzzling to A.J. He argues that everyone who owns any BAC should not keep the share in their portfolio. Rather, they should lend out their shares since not lending out means they will forgo a big stream of revenue - the 15% lending rate. However, at any point in time, any given BAC share must be held by someone. Those holding BAC shares seem ir- rational since, again, by keeping the BAC share in his/her portfolio, he/she gives up the lucrative lending fee. AJ concludes that all shareholders of BAC are irrational. Do you agree with AJ? Explain your reasoning. (c) Compute the implied present value of the dividend paid by company ABC within the next three months given the following information: • The 3-month futures contract on ABC is trading at F-$185. • ABC share is trading at S = $190. . ABC is not special (the stock lending rate is 0%). • The relevant 3-month interest rate is 10% p.a. semi-annual compound- ing, respectively. Explain the difference between the concept of illiquidity and the notion of liquidity risks. (b) Based on the information from the single stock futures market, A.J calcu- lates that the securities lending rate on BAC is 15% p.a. This high lending rate appears puzzling to A.J. He argues that everyone who owns any BAC should not keep the share in their portfolio. Rather, they should lend out their shares since not lending out means they will forgo a big stream of revenue - the 15% lending rate. However, at any point in time, any given BAC share must be held by someone. Those holding BAC shares seem ir- rational since, again, by keeping the BAC share in his/her portfolio, he/she gives up the lucrative lending fee. AJ concludes that all shareholders of BAC are irrational. Do you agree with AJ? Explain your reasoning. (c) Compute the implied present value of the dividend paid by company ABC within the next three months given the following information: • The 3-month futures contract on ABC is trading at F-$185. • ABC share is trading at S = $190. . ABC is not special (the stock lending rate is 0%). • The relevant 3-month interest rate is 10% p.a. semi-annual compound- ing, respectively.

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It looks like youve provided multiple questions Ill address the last one you posted c because it requires a calculation that we can work through toget... View the full answer