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.Under a cash and carry arbitrage, which of the following is correct? a) If the futures contract is overpriced, you want to establish a short position that provides you the commitment to sell at a fixed price, and take the opposite position in the spot market and buy the asset. b) If the futures contract is overpriced, you want to establish a long position that provides you the commitment to buy at a fixed price, and take the opposite position in the spot market and sell the asset. c) If the futures contract is overpriced, you want to establish a short position that provides you the commitment to sell at a higher price, and take the opposite position in the spot market and buy the asset. d) If the futures contract is overpriced, you want to establish a long position that provides you the commitment to sell at a lower price, and take the opposite position in the spot market and sell the asset.

.Under a cash and carry arbitrage, which of the following is correct? a) If the futures contract is overpriced, you want to establish a short position that provides you the commitment to sell at a fixed price, and take the opposite position in the spot market and buy the asset. b) If the futures contract is overpriced, you want to establish a long position that provides you the commitment to buy at a fixed price, and take the opposite position in the spot market and sell the asset. c) If the futures contract is overpriced, you want to establish a short position that provides you the commitment to sell at a higher price, and take the opposite position in the spot market and buy the asset. d) If the futures contract is overpriced, you want to establish a long position that provides you the commitment to sell at a lower price, and take the opposite position in the spot market and sell the asset.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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26.Under a cash and carry arbitrage, which of the following is correct? a) If the futures contract is overpriced, you want to establish a short position that provides you the commitment to sell at position in the spot market and buy the asset. b) If the futures contract is overpriced, you want to establish a long position that provides you the commitment to buy at a fixed price, and take the opposite position in the spot market and sell the asset. c) If the futures contract is overpriced, you want to establish a short position that provides you the commitment to sell at a higher price, and take the opposite position in the spot market and buy the asset. d) If the futures contract is overpriced, you want to establish a long position that provides you the commitment to sell at a lower price, and take the opposite position in the spot market and sell the asset. fixed price, and take the opposite 27.To be able to price an equity forward contracts on a stock, a stock portfolio or an equity index, there is a need to adjust the for the a) forward price; discount rate of the expected dividends b) spot price; discount rate of the expected dividends c) arbitrage profit; present value of the expected dividends d) spot price; present value of the expected dividends 28.What is the no-arbitrage forward price of a 120-day forward on a company now trading at $32.5 with a dividend of $0.50 in 20 days, $0.50 in 90 days, and $0.67 in 190 days, if the yield curve is flat, and the annual risk-free rate is 5.38%? a) $32.5 b) $32.0554 c) $31.50785 d) $0.99215 29.The is used to determine the price of an equity index forward contract, when dividends are paid continuously. a) discount rate b) dividend yield rate c) continuous time discounting d) rediscounting 30.The S&P 500 index has a value of 1,080. The continuous dividend yield is 1.19%, while the constantly compounded risk-free rate is 5.2%. The index's no-arbitrage price for a 120-day forward contract is a) Php1,095. b) Php1,094.33251. c) Php1,102.92887. d) Php1,103.25073. ||
Transcribed Image Text:26.Under a cash and carry arbitrage, which of the following is correct? a) If the futures contract is overpriced, you want to establish a short position that provides you the commitment to sell at position in the spot market and buy the asset. b) If the futures contract is overpriced, you want to establish a long position that provides you the commitment to buy at a fixed price, and take the opposite position in the spot market and sell the asset. c) If the futures contract is overpriced, you want to establish a short position that provides you the commitment to sell at a higher price, and take the opposite position in the spot market and buy the asset. d) If the futures contract is overpriced, you want to establish a long position that provides you the commitment to sell at a lower price, and take the opposite position in the spot market and sell the asset. fixed price, and take the opposite 27.To be able to price an equity forward contracts on a stock, a stock portfolio or an equity index, there is a need to adjust the for the a) forward price; discount rate of the expected dividends b) spot price; discount rate of the expected dividends c) arbitrage profit; present value of the expected dividends d) spot price; present value of the expected dividends 28.What is the no-arbitrage forward price of a 120-day forward on a company now trading at $32.5 with a dividend of $0.50 in 20 days, $0.50 in 90 days, and $0.67 in 190 days, if the yield curve is flat, and the annual risk-free rate is 5.38%? a) $32.5 b) $32.0554 c) $31.50785 d) $0.99215 29.The is used to determine the price of an equity index forward contract, when dividends are paid continuously. a) discount rate b) dividend yield rate c) continuous time discounting d) rediscounting 30.The S&P 500 index has a value of 1,080. The continuous dividend yield is 1.19%, while the constantly compounded risk-free rate is 5.2%. The index's no-arbitrage price for a 120-day forward contract is a) Php1,095. b) Php1,094.33251. c) Php1,102.92887. d) Php1,103.25073. ||
21.The statement, "In the forward market for the initial value to be set to the agreed value by both parties.", is| a) false. b) true. c) neither true nor false d) is irrelevant in forward contracts 22.The following are assumptions to the no-arbitrage principle except: a) Transaction costs are zero. b) There is zero risk-free interest rate. c) There are no restrictions on short sales or on the use of short sale proceeds. d) Both borrowing and lending can be done in unlimited amounts at the risk free rate interest. 23.Assume that a 6-month forward contract on a zero-coupon bond with market face value of Php12,000 and is currently priced at Php8,000. With an annual risk-free interest rate of 5.0625%, the forward contract price under the no-arbitrage principle is (2 points) a) Php8,000. b) Php7,794.87. c) Php7,500. d) Php8,200. 24. Let's pretend the forward contract is truly worth Php8,300 instead of the no-arbitrage price determined above. This bond must be delivered 6 months from now due to a short position in the forward contract. In this case, the arbitrage entails borrowing Php8,000 at the risk-free rate of 5.0625%, purchasing the bond for Php8,000, and simultaneously taking a short position in the forward contract on the zero-coupon bond, obligated to deliver the bond for the forward price and receive Php8,300 at the contract's expiration. We can fulfill our forward contract obligations at the settlement date by delivering the zero-coupon bond for payment of Php8,300, regardless of its market value at the moment. The Php8,300 cash from the forward contract settlement would be used to repay the Php8,000 loan. What is the total amount of repaying the loan over 6 months? a) Php8,000 b) Php7,794.87 c) Php8,200 d) Php7,500 25.From the above item, how much is the arbitrage profit? a) Php100 b) -Php405.13 c) Php0 d) -Php700
Transcribed Image Text:21.The statement, "In the forward market for the initial value to be set to the agreed value by both parties.", is| a) false. b) true. c) neither true nor false d) is irrelevant in forward contracts 22.The following are assumptions to the no-arbitrage principle except: a) Transaction costs are zero. b) There is zero risk-free interest rate. c) There are no restrictions on short sales or on the use of short sale proceeds. d) Both borrowing and lending can be done in unlimited amounts at the risk free rate interest. 23.Assume that a 6-month forward contract on a zero-coupon bond with market face value of Php12,000 and is currently priced at Php8,000. With an annual risk-free interest rate of 5.0625%, the forward contract price under the no-arbitrage principle is (2 points) a) Php8,000. b) Php7,794.87. c) Php7,500. d) Php8,200. 24. Let's pretend the forward contract is truly worth Php8,300 instead of the no-arbitrage price determined above. This bond must be delivered 6 months from now due to a short position in the forward contract. In this case, the arbitrage entails borrowing Php8,000 at the risk-free rate of 5.0625%, purchasing the bond for Php8,000, and simultaneously taking a short position in the forward contract on the zero-coupon bond, obligated to deliver the bond for the forward price and receive Php8,300 at the contract's expiration. We can fulfill our forward contract obligations at the settlement date by delivering the zero-coupon bond for payment of Php8,300, regardless of its market value at the moment. The Php8,300 cash from the forward contract settlement would be used to repay the Php8,000 loan. What is the total amount of repaying the loan over 6 months? a) Php8,000 b) Php7,794.87 c) Php8,200 d) Php7,500 25.From the above item, how much is the arbitrage profit? a) Php100 b) -Php405.13 c) Php0 d) -Php700
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