5. Suppose the one-year futures price on a stock-index portfolio is 1218, the stock indexcurrently is 1200, the one-year risk-free interest rate is 3%, and the ybar-end dividend thatwill be paid on a $1,200 investment in the index portfolio is $15.a. By how much is the contract mispriced?b. Formulate a zero-net-investment arbitrage portfolio and show that you can lock inriskless profits equal to the futures mispricing. Assume a zero bid-ask spread in securityand futures transactions.Now assume that if you short sell the stocks in the index portfolio, the proceeds arekept with the broker, and you do not receive any interest income of the funds. Is therestill an arbitrage opportunity (assuming that you don't already own the shares in theindex)?d. Given the short sale rules, what is the no-arbitrage band for the stock-futures pricerelationship? Specifically, how high and how low can the futures price be withoutgiving rise to arbitrage opportunities.C.

Since you have posted a question with multiple sub-parts, we will solve the first three sub-parts…

Answered: a. By how much is the contract…

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

See similar textbooks

Similar questions

You hold a portfolio of an asset-or-nothing call and a cash-or-nothing put option written on a stock that does not pay dividends. The strike price of the options is the same. The payout of the cash-or- nothing option if it is exercised equals the strike price. Your portfolio is equivalent to O A plain-vanilla call option. O None of the other answers are correct. O A covered call position, i.e., a long stock + short plain vanilla call. O A plain-vanilla put option. O A protective put position, i.e., a long stock + long put option.
(a) What is the expected shape of a futures curve for cotton (a storable commodity)? What about for live hogs (a non-storable commodity)? (b) Explain why a rational economic agent may still choose to hold stocks even if the expected return on stocks is negative.
If underlying is non-dividend paying, then the time value of an American call option is positive, hence American call should never be exercised early. True False
Questionn 1- Select the incorrect statement about the optimal portfolio weights in the SIM from the following: a. When short sales are not allowed, the investor will hold more assets in her portfolio than when short sales are allowed. b. When the single index is tradeable, securities with negative will be shorted. c. When the single index is tradeable, securities with higher (given everything else constant) are more desirable. d. The investor's portfolio with no short sales is less desirable than the portfolio with short sales.
The basis is defined as the spot price minus the futures price. A trader is hedging the sale of an asset with a short futures position. The basis increases unexpectedly. Which of the following is TRUE? a. The hedger’s position stays the same. b. The hedger’s position improves. c. The hedger’s position sometimes worsens and sometimes improves. d. The hedger’s position worsens.
Payoff from entering into a forward contract does the buyer have more to gain going long than the seller has to lose going short, profits if the price of the underlying at expiration exceeds the forward price and/or gains from owning the underlying versus owning the forward contract are equivalent? Explain why one or more of the options above are correct. and why, if any of the remaining options are incorrect.
Select all the events that could cause the price of a security to increase. Correct Answer(s) Drag appropriate answer(s) here The stock price of this firm is expected to The firm's bond rating increases. double. A bond becomes a high-yield security. A secondary market exists for this security. Drag appropriate answer(s) here Incorrect Answer(s)
Which one of the following is a property of a pure arbitrage portfolio? a)Zero return.b)Zero investment.c)Zero price for the assets in the portfolio d)None of the above is correct.
Which statement below is incorrect? Select one: A. The four "V" features of big data include volume, variety, value, and velocity. B. When the price of the underlying asset increases, the call option price will increase while the put option price will decrease. C. The Fama-French High-Minus-Low portfolio (HML) is a strategy that attempts to buy stocks with high prices and sell stocks with low prices. D. The passive mutual funds charge a lower administration fee than the active mutual funds.
Which one of the following expressions about risk and returns is wrong? A. In general, one reason why a stock is riskier than a bond is that because cash flows from a bond are known and promised, whereas cash flows from a stock are neither known nor promised. B. According to CAPM model, a well-diversified portfolio will have a beta which equals to 0. C. Risk premium is the extra return provided on risky assets to compensate for risk. The difference between risky return and the risk-free return. D. Unexpected return happened because new information came to light which caused our expectations about prices and returns to change.
What is the correct strategy when the asset backing the futures contract differs from the asset whose price is being hedged? O Short hedge O Long hedge O Perfect hedge O Tailing the hedge O Cross hedge
Organized exchanges offer important advantages like (a) mitigating credit risk and (b) providing liquidity. But they have the following market imperfections: 1. Open interest in futures contracts declines for longer maturities; so, for liquidity reasons, you may be unable to hedge longer deliveries using longer maturity futures contracts. Explain briefly how you would overcome these market imperfections.

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS