In order to reduce risk when financing his new business, Linda intends to use a 3-month index futures contract. Assume that the index's current value is 2,040, the constantly compounded risk-free interest rate is 7.5% annually, and the dividend yield of that stock is 1% annually. Later, Linda believes that futures contracts on currencies can offer a greater return than futures contracts on indices. Consider storing a 3-year futures contract at a cost of MYR 6 per unit. Assume that the risk-free rate is 6% per year for all maturities and that the current price is MYR 760 per unit. Estimate the predicted price in the future. What will Linda do if she is an arbitrageur, and the real future price is higher than the predicted future price?
In order to reduce risk when financing his new business, Linda intends to use a 3-month index futures contract. Assume that the index's current value is 2,040, the constantly compounded risk-free interest rate is 7.5% annually, and the dividend yield of that stock is 1% annually. Later, Linda believes that futures contracts on currencies can offer a greater return than futures contracts on indices. Consider storing a 3-year futures contract at a cost of MYR 6 per unit. Assume that the risk-free rate is 6% per year for all maturities and that the current price is MYR 760 per unit. Estimate the predicted price in the future. What will Linda do if she is an arbitrageur, and the real future price is higher than the predicted future price?
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