A B C D E Midwest Regional Stock Index 3 Stock Index Current Price 4 Price Today for One Year Futures Contract 12345678902 5 Dividend Yield 6 Predicted Index Price, One Year 7 Brokerage Fee, Shorting Stock $2,784 $2,856 2.00% $2,845 $10.59 Market Data 10 Risk-Free Rate (Annualized) 3.55% 11 12 Required: 13 Note: Use cells A2 to B10 from the given information to complete this question. FL 14 15 Using Spot-Futures Parity, first determine the correct Futures Price. Since this price diverges from the actual price today of a one year futures contract, use the data above to create an arbitrage opportunity. 16 17 Midwest Regional Stock Index 18 Parity Futures Price $2,827.15 G H 19 Now construct an arbitrage opportunity using a single index and futures contract. Show that the initial outlay is zero and the cash 20 received at the end of the period is non-zero. Assume you can borrow or lend at the risk-free rate and any short proceeds also earn the risk-free rate. Any broker's fee is paid initially. 21 23 Buy Stock 24 Short Futures 22222222 25 Borrow 26 Sum Action Initial Cash Flow ($2,794.59) Cash Flow in one Year $0.00
A B C D E Midwest Regional Stock Index 3 Stock Index Current Price 4 Price Today for One Year Futures Contract 12345678902 5 Dividend Yield 6 Predicted Index Price, One Year 7 Brokerage Fee, Shorting Stock $2,784 $2,856 2.00% $2,845 $10.59 Market Data 10 Risk-Free Rate (Annualized) 3.55% 11 12 Required: 13 Note: Use cells A2 to B10 from the given information to complete this question. FL 14 15 Using Spot-Futures Parity, first determine the correct Futures Price. Since this price diverges from the actual price today of a one year futures contract, use the data above to create an arbitrage opportunity. 16 17 Midwest Regional Stock Index 18 Parity Futures Price $2,827.15 G H 19 Now construct an arbitrage opportunity using a single index and futures contract. Show that the initial outlay is zero and the cash 20 received at the end of the period is non-zero. Assume you can borrow or lend at the risk-free rate and any short proceeds also earn the risk-free rate. Any broker's fee is paid initially. 21 23 Buy Stock 24 Short Futures 22222222 25 Borrow 26 Sum Action Initial Cash Flow ($2,794.59) Cash Flow in one Year $0.00
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
Problem 1PS
Related questions
Question
sach.2
Transcribed Image Text:A
B
C
D
E
Midwest Regional Stock Index
3 Stock Index Current Price
4 Price Today for One Year Futures Contract
12345678902
5 Dividend Yield
6 Predicted Index Price, One Year
7 Brokerage Fee, Shorting Stock
$2,784
$2,856
2.00%
$2,845
$10.59
Market Data
10 Risk-Free Rate (Annualized)
3.55%
11
12 Required:
13 Note: Use cells A2 to B10 from the given information to complete this question.
FL
14
15
Using Spot-Futures Parity, first determine the correct Futures Price. Since this price diverges from the actual price today of a
one year futures contract, use the data above to create an arbitrage opportunity.
16
17 Midwest Regional Stock Index
18 Parity Futures Price
$2,827.15
G
H
19
Now construct an arbitrage opportunity using a single index and futures contract. Show that the initial outlay is zero and the cash
20 received at the end of the period is non-zero. Assume you can borrow or lend at the risk-free rate and any short proceeds also earn the
risk-free rate. Any broker's fee is paid initially.
21
23 Buy Stock
24 Short Futures
22222222
25 Borrow
26 Sum
Action
Initial Cash Flow
($2,794.59)
Cash Flow in one Year
$0.00
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