dstefan
03-22-2008, 01:22 PM
Chapter 1, Problem 18:
The risk free rate is 8% compounded continuously and the dividend yield of a stock index is 3%. The index is at 12,000 and the futures price of a contract deliverable in three months is 12,100. Is there an arbitrage opportunity, and how do you take advantage of it?
Solution:
The risk free futures price is S(0) e^{(r-q)T} = 12,000 e^{0.05/4} = 12150.94.
The risk free rate is 8% compounded continuously and the dividend yield of a stock index is 3%. The index is at 12,000 and the futures price of a contract deliverable in three months is 12,100. Is there an arbitrage opportunity, and how do you take advantage of it?
Solution:
The risk free futures price is S(0) e^{(r-q)T} = 12,000 e^{0.05/4} = 12150.94.