(a)
To determine: Whether the statement that the future price on stock index with a high dividend yield should be higher than the future price on index with low dividend yield keeping other things same is true or not alongwith reasons.
Introduction : The future price of any stock index is decided by the spot − future parity equation. When yields are high, the price will be less and vice-versa.
(b)
To determine: Whether the statement that the future price on a high beta stock is higher than future price on a low stock beta keeping other things as same is true or not.
Introduction : The future price of any stock index is decided by the spot − future parity equation. When yields are high, the price will be less and vice-versa.
(c)
To determine: Whether the beta on a short position in S&P 500 futures contact is negative or not.
Introduction : The future price of any stock index is decided by the spot − future parity equation. When yields are high, the price will be less and vice-versa.
Want to see the full answer?
Check out a sample textbook solution- Consider a stock that pays no dividends on which a futurescontract, a call option, and a put option trade. The maturity date for all three contracts is T, the strikeprice of both the put and the call is K, and the futures price is F. Prove that if K = F, then the price ofthe call option equals the price of the put option.arrow_forwardConsider two European call options with strike K and the same underlying non- dividend paying stock. The stock price is currently at So. Option 1 has price C₁ maturity T₁ and Option 2 has price C₂ and maturity T2, where T₂ > T₁. The risk-free interest rate is r. Use a no-arbitrage argument to prove that C₂ > C₁-arrow_forwardAt time t = 0, a trader takes a long position in a futures contract on stock i that willexpire at time T. the present value of this contract to the long is given by: See Image. Assume no-arbitrage price, briefly descthat if the return from stock i is positively correlated with the overall return on the stock market, then the futures market must be in backwardation at time t = 0.arrow_forward
- Assume that F, and F2 are the futures prices of two contracts on the same non-dividend- paying investment asset, with times to maturity T, and T2, T2 > T1. Prove that the relationship between the two prices must be F2 = F,e"(12-11) by describing the arbitrage strategies that exist for mispricing (i.e. F2 too low or too high).arrow_forwardThe basis is defined as the spot price minus the futures price. A trader is hedging the sale of an asset with a short futures position. The basis falls unexpectedly. Which of the following is true? Question 3Answer a. The hedger’s position sometimes worsens and sometimes improves. b. The hedger’s position stays the same. c. The hedger’s position worsens. d. The hedger’s position improves.arrow_forwardAt time t = 0, a trader takes a long position in a futures contract on stock i that willexpire at time T. the present value of this contract to the long is given by: See Image.Assume no-arbitrage pricing. Show analytically that if the return from stock i is positively correlated with the overall return on the stock market, then the futures market must be in backwardation at time t = 0.arrow_forward
- Stock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true about these securities? (Assume market equilibrium.) a. Stock B must be a more desirable addition to a portfolio than A. b. Stock A must be a more desirable addition to a portfolio than B. c. The expected return on Stock A should be greater than that on B. d. The expected return on Stock B should be greater than that on A. e. When held in isolation, Stock A has more risk than Stock B.arrow_forward(b) Consider two options on the same stock and same time to maturity but with different strike prices. For option A, the strike price (K1) is equal to 10 USD, while for option B, the strike price (K2) is equal to 9.5 USD. The current stock price (S) is equal to 10 USD. There are no dividends and the risk - free is 3% p.a. In calculating the arbitrage - free option prices an investor's volatility estimate is 15% p.a. Yet option A trades for 0.8 USD and option B for 1 USD. i. Compare the implied volatilities of both options A and B to the investor's estimate of 15% ii. ii. Identify the optimal strategy in the two options. Using the investor's volatility estimate, derive the delta - neutral position of your call option portfolio.arrow_forwardQuestion 1. Let St be the current price of a stock that pays no dividends. a)Let rbid be the interest rate at which one can invest/lend money, and roff be theinterest rate at which one can borrow money, rbid≤roff. Both rates are continuously compounded. Using arbitrage arguments, find upper and lower bounds for the forwardprice of the stock for a forward contract with maturity T > t. b)How does your answer change if the stock itself has bid price St,bid and offer price St,off?arrow_forward
- After paying the initial margin, a futures investor does not have to pay any additional money until the investor's equity position falls below zero. True Falsearrow_forwardConsider a security that pays income to its holders (e.g., a dividend-paying stock, or acoupon bond). Should the forward price of this security (for a contract that matures attime T), F0,T, be higher than, lower than, or equal to the security's current spot price?Why?.arrow_forwardIf a stock's price is above the strike price of a call option written on the stock, then the exercise value is equal to the stock price minus the strike price. If the stock price is below the strike price, the exercise value of the call option is zero. True or False?arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author: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 ProfessorPublisher:McGraw-Hill Education