Arbitrage strategy to profit from mispricing

Assignment Help Finance Basics
Reference no: EM133069287

You have a diversified portfolio of U.S equities. Your portfolio has a value of $10 million, and a beta of 1.5. Its volatility is 25% per annum, while the volatility of the S&P 500 index is 20% per annum. The current level of the index is 4,450. You would like to hedge you portfolio and have decided to hedge using S&P 500 futures contracts that expires in three months. This futures contract is trading at 4,463 and the value of the contract is $250 times the index. The average dividend yield on the index is 2% per annum and the risk free rate is currently at 1.5% per annum. All rates are continuously compounded.

-Is this futures contract fairly priced?

-If not, design the arbitrage strategy to profit from this mispricing. Show all your positions and cash flows in a table

Reference no: EM133069287

Questions Cloud

Fluctuations of foreign currency exchange rates : There are some risks involved with international transactions due to fluctuations of the foreign currency exchange rates.
What is the net selling price per bushel : By the beginning of September, cash and future prices of soybeans have fallen. The cash price of soybeans is now $5.72 per bushel, and the futures price of Nove
Translation exposure and transaction exposure : It is generally not possible to completely eliminate both translation exposure and transaction exposure.
Calculate the expected return of the fund manager : a) A fund manager has maintained an actively managed portfolio with a beta of 0.2. During the last year, the risk-free rate was 5% and major equity indices perf
Arbitrage strategy to profit from mispricing : -If not, design the arbitrage strategy to profit from this mispricing. Show all your positions and cash flows in a table
What is the current market value of company a equity : What is the current market value of Company A's equity? Company A's debt? Company B's equity? Company B's debt
What is functional strategy : What is a functional strategy? What are stability strategies in business? What are the pros and cons of these strategies?
About the project budget and schedule : Consider a situation when you were leading a project and you received bad news from a team member about the project budget and schedule.
Present value of the interest rate tax shield : Company A keeps a constant debt-to-equity ratio policy. The company has an expected EBITDA that perpetually grows at a 2% annual rate.

Reviews

Write a Review

Finance Basics Questions & Answers

  How many common shares are currently outstanding

PP industries has $450 million of common equity on its balance sheet, its stock price is $40 per share, and its market value added is $50 million.

  Analyze the agencys compensation for employees

Analyze the agency's compensation for employees. Provide a rationale on what the costs and benefits would be for a 2 percent, 4 percent, or 5 percent pay increase for the fiscal year 2014.

  HI5002 Finance for Business Assignment

HI5002 Finance for Business Assignment Help and Solution, Holmes Institute - Assessment Writing Service - Critically evaluate the role of finance in business

  Find the sinking fund payment you would need to make

Find the sinking fund payment you would need to make at the end of each year, at 11% interest compounded annually, to amount to $4,000 in 5 years.

  Horizontal and vertical analysis of the income statements

Horizontal and vertical analysis of the Income Statements

  At what size capital structure will there be a change

The 6.5 percent cost of debt referred to earlier applies only to the first $17 million of debt. After that the cost of debt will go up.

  Distribution from stock bonus plan

Randy, age 63, is a participant in the stock bonus plan of XYZ, Inc.,  Which of the following correctly describes Randy's tax consequences in year 6 from this distribution if Randy does not sell the XYZ stock until year 8?

  Firm p liqudated balance sheet below is current fixed asset

Firm P liqudated  balance sheet below is current Fixed assets sold = 900,000.00 Current assets " = 700,000.00 Fixed assets pledge collateral all mortage bond Subordinated deben tures only note payable Trustee cost = 70,000.00 Sales current asset = 70..

  Complete independence of forex market

Which of the following statements is correct: I. Crawling peg regime allows the currency to depreciate gradually over time within a limited range;

  List factors-causes that contributed to great depression

Compare and list the factors/causes that contributed to the Great Depression (1929 - 1933), the Global Financial Crisis (2007 - 2009) and the current COVID-19

  What risk exposure does qatar have

What risk exposure does Qatar have? What position should it take if Qatar wants to use heating oil futures to hedge the exposure?

  Discuss the Factors affecting the Capital Adequacy Ratio

Need PowerPoint with a very good literature review of at least 12 papers. Topic- Factors affecting the Capital Adequacy Ratio and Non Performing Loans of Banks

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd