In January 2015, you observe the following: The spot S&P 500 price is currently $2,050. The stocks in the S&P 500 will pay 1% dividends from now until March 2015. The riskless interest rate from now until March 2015 is 0.3% (0.003). There exist futures contracts with a price of $2,030.
Each contract calls for delivery of 250 “baskets” of the stocks in the S&P 500 in March 2015. The cost of short selling in the (spot) stock market from now until March 2015, is 0.5% (0.005) of today’s spot value, and is paid on the delivery day, when you close the short sale. a) Are there arbitrage opportunities for investors WHO DO NOT OWN S&P 500 stocks and must short-sell them? If yes, design the arbitrage and calculate the profits. Explain.
Suppose that you are the manager of a mutual fund that is indexed to the S&P 500 index (which means that it currently own the S&P 500 shares – the shares of the stocks that are in the S&P 500 index). The current market value of fund’s equity is $41,000,000. Is there an investment strategy that will ALWAYS beat the return on the S&P 500 in the spot market? If yes, design the strategy and calculate the profits. Is the TOTAL return on the strategy designed in (b) riskless? Is ANY COMPONENT of the return on this strategy riskless? Explain. Let’s check if your strategy above performs as you claim: Calculate the total dollar return on your strategy and on a strategy of keeping the shares in the spot market when the spot S&P 500 price on the futures’ delivery day is $2,500? Calculate the total dollar return on your strategy and on a strategy of keeping the shares in the spot market when the spot S&P 500 price on the futures’ delivery day is $1,800? Get Finance homework help today