Stock XYZ is currently trading at $150. One-year futures contract price on XYZ is $152. XYZ is scheduled to pay $3 cash dividends per share in one year and the annually compounded risk-free rate is 4% p.a. To exploit the arbitrage opportunity, an arbitrageur would Select one alternative: O Buy XYZ, borrow money, and sell futures O Short-sell XYZ, borrow money, and buy futures O Buy XYZ, lend money, and sell futures O Short-sell XYZ, lend money, and buy futures

Stock XYZ is currently trading at $150. One-year futures contract price on XYZ is $152. XYZ is scheduled to pay $3 cash dividends per share in one year and the annually compounded risk-free rate is 4% p.a. To exploit the arbitrage opportunity, an arbitrageur would Select one alternative: O Buy XYZ, borrow money, and sell futures O Short-sell XYZ, borrow money, and buy futures O Buy XYZ, lend money, and sell futures O Short-sell XYZ, lend money, and buy futures

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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Similar questions

MHF believes the price of Amazon is going to fall substantially over the next 8 months. MHF uses an option (use the January 2024 contract with an exercise price of $95) to hedge the risk as it owns 10 million shares of Amazon. It will hedge exactly 50% of its position. Identify the type of option most likely used. Show the total position (please put this in a table) of the spot and derivative at expiration if the price of Amazon at expiration is a) $62; b) $77; c) $93; d) $112; e) $128. Only typed answer
One share of Napier Inc. is currently trading at $84 per share. In one year, the price is expected either (1) rise to $105 or (2) fall to $60. You are interested in purchasing a call option on Napier, Inc. The option has a strike price of $92 and expires in 1 year. The current risk-free rate for the year is 4%. Based on binomial options pricing (as shown in class), what is a fair price for this option? Answer to the nearest cent, with no punctuation. That is, $5.289 should be entered at 5.29.
5. Suppose the one-year futures price on a stock-index portfolio is 1218, the stock index currently is 1200, the one-year risk-free interest rate is 3%, and the ybar-end dividend that will 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 in riskless profits equal to the futures mispricing. Assume a zero bid-ask spread in security and futures transactions. Now assume that if you short sell the stocks in the index portfolio, the proceeds are kept with the broker, and you do not receive any interest income of the funds. Is there still an arbitrage opportunity (assuming that you don't already own the shares in the index)? d. Given the short sale rules, what is the no-arbitrage band for the stock-futures price relationship? Specifically, how high and how low can the futures price be without giving rise to arbitrage opportunities. C.
The spot price of oil is $40 per barrel and the cost of storing a barrel of oil for one year is $3.3, payable at the end of the year. The risk-free interest rate is 2.6% per annum, continuously compounded. What is an upper bound for the one-year futures price of oil? Your answer should be correct to one decimal place. Assume there are no transaction costs involved in arbitraging over-priced futures contracts.
You enter into a 1-year futures contract on a non-dividend paying stock when the stock price is $100 and the risk-free interest rate is 5% per annum. Six months later the stock price has fallen to $90, and the interest rate is 4% per annum. Which of the answers below is closest to the change in the futures price? Assume discrete compounding and discounting. Question 6Answer a. -12.34 b. -11.40 c. -10.00 d. -13.20
The one-year futures price on a particular stock-index portfolio is 2,620, the stock index currently is 2,600, the one-year risk-free interest rate is 2.0%, and the year-end dividend that will be paid on a $2,600 investment in the index portfolio is $25. Required: By how much is the contract mispriced? (Input the amount as positive value.) The futures price is its "proper" or parity value.
You BUY a futures contract with the characteristics below. Assuming the S&P500 contract suddenly RISES by 12.00 points, what is your profit or loss as a return on the initial margin? S&P500 e-mini contract Futures (FO) 2,646.000 Initial margin 5420 Maint margin 4610 O 9.68% O 11.07% 10.15% 11.49% O 10.61%
A non-dividend paying asset is current priced at $25 and the risk-free interest rate is 8% per annum. Today, you enter into a six-month futures contract to buy a unit of this asset. Three months from now the underlying price has fallen to $18 (but note that the interest rate has not moved). Which of the answers below is closest to the fall in the futures price? Use discrete discounting. Question 7Answer a. $6.50 b. $5.50 c. $7.50 d. $4.50
A single-name trader asks you to approve a short 1Y, $150m Notional 130% strike call on Tellurian (on Yahoo Finance the ticker is Tell) with 1Y maturity. Do you approve of it? Why? Do you request any conditions for your approval?

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