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Chapter 5: Q17-9I (page 589)

It is now January. The current interest rate is 4%. The June futures price for gold is\(1,646.30, while the December futures price is \)1,651. Is there an arbitrage opportunityhere? If so, how would you exploit it?

Short Answer

Expert verified

No. Doing long the December contract and doing Short the June contract can be beneficial.

Step by step solution

01

Given information

FJune= $1646.30

rf= .04

T = ½ Years

FDec= ?

02

Calculation of no arbitrage price for December futures’

FDec = FJune (1 + rf)1/2

$1646.30 x (1 + 0.04)1/2

= $1675.844

This implies that the Futures’ December price is too low compared with June Price. In such a case, doing long the December contract and doing Short the June contract can be beneficial.

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Most popular questions from this chapter

The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next three months. You do not know whether it will go up or down, however. The current price of the stock is \(100 per share, the price of a three-month call option with an exercise price of \)100 is \(10, and a put with the same expiration date and exercise price costs \)7.

a. What would be a simple options strategy to exploit your conviction about the stock price’s future movements?

b. How far would the price have to move in either direction for you to make a profit on your initial investment?

A bearish spread is the purchase of a call with exercise price X 2 and the sale of a call with exercise price X 1, with X 2 greater than X 1. Graph the payoff to this strategy and compare it to Figure 15.10 .

A silver futures contract requires the seller to deliver 5,000 Troy ounces of silver. Jerry Harris sells one July silver futures contract at a price of \(28 per ounce, posting a \)6,000 initial margin. If the required maintenance margin is $2,500, what is the first price per ounce at which Harris would receive a maintenance margin call?.

The multiplier for a futures contract on a certain stock market index is \(250. The maturity of the contract is one year, the current level of the index is 1,000, and the risk-free interest rate is .2% per month. The dividend yield on the index is .1% per month.

Suppose that after one month, the stock index is at 1,020.

a. Find the cash flow from the mark-to-market proceeds on the contract. Assume that the parity condition always holds exactly.

b. Find the holding-period return if the initial margin on the contract is \)10,000.

a. Turn to Figure 17.1 and locate the contract on the Standard & Poor’s 500 Index. If the margin requirement is 10% of the futures price times the multiplier of $250, how much must you deposit with your broker to trade the September contract?

b. If the September futures price were to increase to 1,200, what percentage return would you earn on your net investment if you entered the long side of the contract at the price shown in the figure?

c. If the September futures price falls by 1%, what is the percentage gain or loss on your net investment?
See all solutions

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