5. Suppose the one-year futures price on a stock-index portfolio is 1218, the stock indexcurrently is 1200, the one-year risk-free interest rate is 3%, and the ybar-end dividend thatwill 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 inriskless profits equal to the futures mispricing. Assume a zero bid-ask spread in securityand futures transactions.Now assume that if you short sell the stocks in the index portfolio, the proceeds arekept with the broker, and you do not receive any interest income of the funds. Is therestill an arbitrage opportunity (assuming that you don't already own the shares in theindex)?d. Given the short sale rules, what is the no-arbitrage band for the stock-futures pricerelationship? Specifically, how high and how low can the futures price be withoutgiving rise to arbitrage opportunities.C.

Since you have posted a question with multiple sub-parts, we will solve the first three sub-parts…

Answered: a. By how much is the contract…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 20P

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Suppose the quoted futures price for delivery in 1 year is $7.10. The current underlying price is $7 and the continuously compounded interest rate is 5%. The underlying does not pay dividends. How could you make a riskless arbitrage profit? Question 2Answer a. buy futures contracts, short sell the stock and invest in a bank account b. borrow from the bank to buy futures contracts and short sell the stock c. sell futures contracts, borrow and buy the stock d. sell future contacts, short sell the stock and invest in a bank account
The market price of a security is $52. Its expected rate of return is 12.1%. The risk-free rate is 4%, and the market risk premium is 7.3%. What will be the market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged)? Assume that the stock is expected to pay a constant dividend in perpetuity. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Market price
Suppose XYZ stock pays no dividends and has a current price of $50. The forward price for delivery in 1 year is $55. Suppose the 1-year eective annual interest rate is 10%. (a) Graph the payo and prot diagrams for a forward contract on XYZ stock with a forward price of $55. (b) Is there any advantage to investing in the stock or the forward contract? Why? (c) Suppose XYZ paid a dividend of $2 per year and everything else stayed the same. Now is there any advantage to investing in the stock or the forward contract? Why?
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Consider an American call and an American put with the same underlying stock share S paying no dividend, the same strike price K = $30 and the same expiration date T = 3 (months). Suppose that the stock price is $31, the risk-free interest rate is 10% per annum compounded continuously, the price of the American call option is $3, and the price of the American put option is $1. Using the no-arbitrage principle, prove that there exists an arbitrage opportunity then.
Suppose a firm offers an equity-linked security. The face value is $1 million and its payoff is based on any appreciation in an equity index currently at 855.50. It has determined that of the $1 million raised, it can structure the option component so that its value is $135,000. Currently an at-the- money call option is worth $125. What percentage of the gain in the index can it offer? A. 92% B. 23% C. 100% D. 50%
Required: The market price of a security is $56. Its expected rate of return is 12%. The risk-free rate is 5%, and the market risk premium is 9%. What will the market price of the security be if its beta doubles (and all other variables remain unchanged)? Assume the stock is expected to pay a constant dividend in perpetuity. (Round your answer to 2 decimal places.) > Answer is complete but not entirely correct. Market price $ 36.37 X
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Data: S0 = 102; X = 115; 1 + r = 1.1. The two possibilities for ST are 146 and 84. Required: The range of S is 62 while that of P is 31 across the two states. What is the hedge ratio of the put? Form a portfolio of one share of stock and two puts. What is the (nonrandom) payoff to this portfolio? What is the present value of the portfolio? Given that the stock currently is selling at 102, calculate the put value.
You buy a share of stock, write a 1-year call option with X= $95, and buy a 1-year put option with X= $95. Your net outlay to establish the entire portfolio is $94. The stock pays no dividends. a. What is the payoff of your portfolio? Payoff b. What must be the risk-free interest rate? (Round your answer to 2 decimal places.) Risk-free rate
Problem 1 Suggest two different portfolios that produce the payoff diagram as in the graph below. Both portfolios may contain any amount of risk-free borrowing or lending, and the underlying stock. Portfolio 1 may contain call options but no put options. Portfolio 2 may contain put options but no call options. Assume the risk-free rate is rf = 10%. 25 20 15 10 5 10 15 20 25 30 35 40 -5 -10 -15 Problem 2 Suppose that a stock is currently trading at $60 per share, and the stock price can only take two possible values one year from now: it can either go up by 25% or down by 20%. The annual risk-free rate is 4%. Assume that the stock pays no dividends. You are interested in pricing an European put option on this stock. The option has a strike price of $66, and its maturity date is exactly one year from now. a) What is the payoff on the put option if the stock price goes up by 25%? b) What is the payoff on the put option if the stock price goes down by 20%? c) What is the price of the put…

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