On October 4, 2020 you observe the following statistics

Stock price: $60

Market futures price for stock deliverable on April 4, 2021: $54.14

There is a cash dividend payable on January 4, 2021.

You can borrow and lend at a 0.5% continuously compounded annual rate.

October 4 to April 4: 180 days.

October 4 to January 4: 90 days

One year is 360 days long (makes life easier)

a. Assuming that there are no arbitrage opportunities, what is the size of the dividend (in $) payment implied by the market futures price? You estimate the dividend payment to be $5.50.

b. Given your estimate. Is the market futures price too high or too low?

c. Assuming that your dividend estimate is correct. Construct an arbitrage strategy using the stock index, the futures contract and risk-free borrowing and lending. Briefly explain your strategy and Show your cash flows.

d. You receive new information about this stock and decide that you wish to short sell it but are unable to find a broker to lend it to you. Explain how you could use futures contracts to short sell the stock.

Answer rating: 100% (QA)

a The dividend payment implied by the market futures price is 514 541460e05180360514e0590360 51460e051803605414e0590360 The stock price today is 60 Th... View the full answer