Many companies practice what is called yield curve arbitrage

Assignment Help Financial Management

Reference no: EM131850289

a) If you exercise an American call at time t < T (where T is the expiration), do you exercise right before, or right after the stock pays its dividend at time t? Why?

b) Many companies (e.g., banks) practice what is called "yield curve arbitrage". The idea is that returns on longer-maturity debt are higher than for shorter maturity debt. An institution attempting to profit from this discrepancies will lend money long term while borrowing short term and rolling the short term debt, in order to profit from the difference. Is this an arbitrage?

c) Show that P(T2) is greater or equal than P(T1) for two American puts with maturities T2>T1. Show that it is NOT true for European puts.

e) The current price of a share of ABC, Inc. is $31 and the riskless rate of return is 10 percent per annum (annual compounding). Consider a European put and a European call sharing the common exercise price of $30 and the common maturity of 3 months. The price of the put is $2.25 and the price of the call is $2.35. Are there any arbitrage opportunities? If so, construct a trading strategy to take advantage of the opportunity.

Reference no: EM131850289

Questions Cloud

How do we fix the given problem : Here's even more proof that incentives can be powerful motivators-perhaps too powerful. Atlanta Public Schools reward teachers, principals, and administrators.

What information would like about the nature of the turnover : As VP of HR at Pilsner Roofing, the eleventh largest roofing company in the world, you are experiencing turnover problems with the employees.

How would you educate the public about mortgage lending : How would you educate the public about mortgage lending? Discuss different measures of the level of the stock market, the stock market’s role in the economy.

How is an earnings-at-risk plan different : How is an earnings-at-risk plan different from an ordinary gain-sharing or profit sharing plan? How might earnings-at-risk plans affect attraction.

Many companies practice what is called yield curve arbitrage : Many companies practice what is called "yield curve arbitrage". The idea is that returns on longer-maturity debt are higher than for shorter maturity debt.

Why accounting standards make stock options less popular : Why do the new accounting standards make stock options less popular? When might you use a group incentive plan rather than an individual plan?

Domestic and international bond markets : Discuss and elaborate the recent functions and size of the domestic and international bond markets.

What is your estimate of the current stock price : Fincher Manufacturing has projected sales of $145.4 million next year. What is your estimate of the current stock price?

Discuss ways to improve performance ratings : We talked in depth about four ways to improve performance ratings. Pick one that you think shows the most promise and defend your position.

User Account

All Pages