Reference no: EM133032561
Question I:
Suppose you are a market-maker in S&R index forward contracts. The S&R index spot price is 1100, the risk-free rate is 5%, and the dividend yield on the index is 1.5%.
(a) What is the no-arbitrage forward price for delivery in 9 months?
(b) Suppose a customer wishes to enter a short index futures position. If you take the opposite position, demonstrate how you would hedge your resulting long position using the index and borrowing or lending.
(c) Suppose a customer wishes to enter a long index futures position. If you take the opposite position, demonstrate how you would hedge your resulting short position using the index and borrowing or lending.
Question II:
The S&R index spot price is 1100, the risk-free rate is 5%, and the continuous dividend yield on the index is 2%.
(a) Suppose you observe a 6-month forward price of 1120. What arbitrage would you undertake? (b) Suppose you observe a 6-month forward price of 1110. What arbitrage would you undertake?
Question III:
The current value of an S&R futures is 1000$. You buy 50 futures on the S&R and the contract size is 500$. The margin is settled on a weekly basis and the margin is 12.5% of the notional value. Margin calls are made as soon as the the margin is below 75% of the initial margin level. We assume that r =5%. Use an Excel spreadsheet to calculate the profit over the whole period for a) Futures and b) Forward contract. Upload your Excel Spreadsheet with the detailed calculations on Avenue to Learn under Assessments/Assignments/Assignment II (Question III). Please write your name on Excel file.
Question IV:
The S&R index spot price is 1100 and the continuously compounded risk-free rate is 5%. You observe a 9-month forward price of 1129.257.
(a) What dividend yield is implied by this forward price?
(b) Suppose you believe the dividend yield over the next 9 months will be only 0.5%. What arbitrage would you undertake?
(c) Suppose you believe the dividend yield will be 3% over the next 9 months. What arbitrage would you undertake?