Consider a XYZ stock index spot price is 69 and 7-months forward price is 70. The continuously compounded dividend yield and risk-free interest rate are 3% and 5% respectively. Market maker could take arbitrage opportunity by (long/short) forward contract and (long/short) synthetic forward contract which includes (buying/selling) stock and (borrowing / lending) money. So the profit at expiration time will be (Please round your answer to 4 decimal places)

Consider a XYZ stock index spot price is 69 and 7-months forward price is 70. The continuously compounded dividend yield and risk-free interest rate are 3% and 5% respectively. Market maker could take arbitrage opportunity by (long/short) forward contract and (long/short) synthetic forward contract which includes (buying/selling) stock and (borrowing / lending) money. So the profit at expiration time will be (Please round your answer to 4 decimal places)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 20P

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Concept explainers

Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.

Question

Consider a XYZ stock index spot price
is 69 and 7-months forward price is 70.
The continuously compounded
dividend yield and risk-free interest
rate are 3% and 5% respectively.
Market maker could take arbitrage
opportunity by
(long/short)
forward contract and
(long/short) synthetic forward contract
which includes
(buying/selling) stock and
(borrowing / lending )
money.
So the profit at expiration time will be
(Please round your
answer to 4 decimal places)

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