In July 2004, six-month futures on the FTSE 500 stock index traded at 16,000. The spot was 13,300. The interest rate was 19% p.a. and the dividend yield was 4% (for six months). Assume that the entire dividend is paid on contract maturity, and the contract concerns the ex-dividend price. Are the futures are fairly priced? If not, illustrate an arbitrage strategy to take advan- tage of this opportunity.
In July 2004, six-month futures on the FTSE 500 stock index traded at 16,000. The spot was 13,300. The interest rate was 19% p.a. and the dividend yield was 4% (for six months). Assume that the entire dividend is paid on contract maturity, and the contract concerns the ex-dividend price. Are the futures are fairly priced? If not, illustrate an arbitrage strategy to take advan- tage of this opportunity.
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
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Answer using futures pricing formulas
Transcribed Image Text:In July 2004, six-month futures on the FTSE 500 stock index traded at 16,000. The
spot was 13,300. The interest rate was 19% p.a. and the dividend yield was 4% (for
six months). Assume that the entire dividend is paid on contract maturity, and the
contract concerns the ex-dividend price.
Are the futures are fairly priced? If not, illustrate an arbitrage strategy to take advan-
tage of this opportunity.
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