GEN COMBO LOOSELEAF INVESTMENTS; CONNECT ACCESS CARD
11th Edition
ISBN: 9781260201550
Author: Bodie
Publisher: MCG
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Chapter 22, Problem 16PS
Summary Introduction
To compute: The arbitrage strategy required to exploit the mispricing in future market. Supposing that S&P futures price for delivery in 1 year is 2,050, current value is 2,000, T-bill rate is 4%.
Introduction:
Arbitrage: Arbitrage can be termed as that transaction done through which there is a chance of two assets producing the same results but may sell at different prices. Arbitrage is important due to the fact the when there is a huge purchase of assets which are cheaper, its price will increase. On the other hand, when an asset is sold at a high price, its price will decrease.
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The S&P portfolio pays a dividend yield of 1% annually. Its current value is 1,300. The T-billrate is 4%. Suppose the S&P futures price for delivery in 1 year is 1,330. Construct an arbitragestrategy to exploit the mispricing and show that your profits 1 year hence will equal the mispricing in the futures market.
A European call that will expire in one year is currently trading for $3. Assume the risk-free rate (based on continuous compounding) is 5%, the underlying stock price is $60 and the strike price is $55.
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Use at least four decimal places for those questions that require a numerical answer.
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Chapter 22 Solutions
GEN COMBO LOOSELEAF INVESTMENTS; CONNECT ACCESS CARD
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