Given the following quotes: FBM KLCI spot = 747 points, risk-free rate = 4.5% annualised, FBM KLCI dividend yield = 1.75% annualised. i) If the 90-day KLCI futures is quoted at 762 points, show that arbitrage is possible ii) Calculate the arbitrage profit if FBM KLCI is 10% higher by futures maturity.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Given the following quotes: FBM KLCI spot = 747 points, risk-free rate = 4.5% annualised, FBM KLCI dividend yield = 1.75% annualised.
- i) If the 90-day KLCI futures is quoted at 762 points, show that arbitrage is possible
- ii) Calculate the arbitrage profit if FBM KLCI is 10% higher by futures maturity.
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