This question is about futures risk premia. Consider a two period economy.You can buy stocks in period 0, and then sell them in period 1. You can also enter into futures contracts in period 0, which expire in period 1. Since buying single-stock futures appears to be a fairly profitable trade, you decide to invest in a futures strategy. You enter a long futures contract position. You also invest cash in period 0 at the risk-free rate, so you have just enough to pay for the futures contract at expiration. You plan to sell the stock just after expiration. What is the expected return on this trading strategy (in terms of expected period-1 dollars you get, per period-0 dollar invested)?
This question is about futures risk premia. Consider a two period economy.You can buy stocks in period 0, and then sell them in period 1. You can also enter into futures contracts in period 0, which expire in period 1. Since buying single-stock futures appears to be a fairly profitable trade, you decide to invest in a futures strategy. You enter a long futures contract position. You also invest cash in period 0 at the risk-free rate, so you have just enough to pay for the futures contract at expiration. You plan to sell the stock just after expiration. What is the expected return on this trading strategy (in terms of expected period-1 dollars you get, per period-0 dollar invested)?
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
Related questions
Question
This question is about futures risk premia. Consider a two period economy.You can buy stocks
in period 0, and then sell them in period 1. You can also enter into futures contracts in period 0, which
expire in period 1.
Since buying single-stock futures appears to be a fairly profitable trade, you decide to
invest in a futures strategy. You enter a long futures contract position. You also invest cash in period 0 at the risk-free rate, so you have just enough to
pay for the futures contract at expiration. You plan to sell the stock just after expiration. What is the
expected return on this trading strategy (in terms of expected period-1 dollars you get, per period-0
dollar invested)?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education