Consider the futures contract written on the S&P 500 index and maturing in one year. The interest rate is 3%, and the future value of dividends expected to be paid over the next year is $35. The current index level is 2,000. Assume that you can short sell the S&P index.a. Suppose the expected rate of return on the market is 8%. What is the expected level of the index in one year?b. What is the theoretical no-arbitrage price for a 1-year futures contract on the S&P 500 stock index?c. Suppose the actual futures price is 2,012. Is there an arbitrage opportunity here? If so, how would you exploit it?
Consider the futures contract written on the S&P 500 index and maturing in one year. The interest rate is 3%, and the future value of dividends expected to be paid over the next year is $35. The current index level is 2,000. Assume that you can short sell the S&P index.a. Suppose the expected rate of return on the market is 8%. What is the expected level of the index in one year?b. What is the theoretical no-arbitrage price for a 1-year futures contract on the S&P 500 stock index?c. Suppose the actual futures price is 2,012. Is there an arbitrage opportunity here? If so, how would you exploit it?
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
Consider the futures contract written on the S&P 500 index and maturing in one year. The interest rate is 3%, and the
The current index level is 2,000. Assume that you can short sell the S&P index.
a. Suppose the expected
b. What is the theoretical no-arbitrage price for a 1-year futures contract on the S&P 500 stock index?
c. Suppose the actual futures price is 2,012. Is there an arbitrage opportunity here? If so, how would you exploit it?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
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