Can you please 32 and 33? index fund pays a dividend yield of d-2% annually. Its
ID: 2804798 • Letter: C
Question
Can you please 32 and 33? index fund pays a dividend yield of d-2% annually. Its current share price is s-moo. The ttill rate is sa% suppose the S&P; futures price for delivery in 1 year is F.-S2,050 Answer question 3a duba donte information above. 32. Based on the spot-futures parity, how much should be the futures price if the spot price is correce? a. b. c. d. e. $1,980 $2,020 $2,050 $2,080 None of the above options is correct 33. Which of the following arbitrage strategy could exploit the mispricing (compared to the spot price) in the future contract? a. Buy index fund share, short futures, and borrow at the risk-free rate. b. Buy index fund share, buy futures, and borrow at the risk-free rate. c. Short index fund share, short futures, and lend at the risk-free rate. d. Short index fund share, buy futures, and lend at the risk-free rate. e. None of the above options is correctExplanation / Answer
32. SHare price =2000
risk free rate = T bill rate = 3%
dividend after a year = 2% of 2000 = 40
PV of dividend =40/(1+risk free rate) = 40/(1+0.03) = 38.83
Future price based on parity = (share price - pv of dividend)*(1+0.03) = (2000-38.83)*1.03 = 2020.005
so, option b is correct
33) One could borrow 2000 at risk free rate and use to it buy the shares now.
At the same time he could enter into a short position in S&P futures.
After a year he will close his short position in shares by delivering the shares he already holds at $2050
He also obtains a dividend of $40 from holding the share for a year.
He receives $(2050+40) = $2090 in total.
To bay back his borrowing in risk free rate he will have to pay 2000*(1+0.03) = $2060
He makes $(2090-2060) = $30 as riskless profit.
Option a is correct