Construct an arbitrage strategy to exploit the mispricing

Reference no: EM133264739

Part A: The S&P portfolio pays a dividend yield of 1% annually. Its current value is 1,500. The T -bill rate is 4%. Suppose the S&P futures price for delivery in 1 year is 1,550. Construct an arbitrage strategy to exploit the mispricing and show that your profits 1 year hence equal the mispricing in the futures market

Part B: Suppose that the value of the S&P 500 stock index is 1,600

a. If each futures contract costs $25 to trade with a discount broker, how much is the transaction cost per dollar of stock controlled by the futures contract?

b. If the average price of a share on the NYSE is about $40, how much is the transaction cost per "typical share" controlled by one futures contract?

c. For small investors, a typical transaction cost per share in stocks directly is about 10 cents per share. How many times the transactions costs in futures markets is this?

Reference no: EM133264739

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