advisor at Festo Ltd. Your client would like to explore the possibility of an arbitrage opportunity on the following futures contract. The futures contract will expire in 9 months. The underlying asset is a non-dividend paying share that is currently trading at a price of R120 per share. The risk-free interest rate per month is 0.67%. The current futures price is R125, however, the intrinsic or fair value of the futures is estimated to be R127.43. Required: 5.1. Ignoring transaction and other costs, detail the appropriate arbitrage strategy. 5.2. Discuss any two differences between
advisor at Festo Ltd. Your client would like to explore the possibility of an arbitrage opportunity on the following futures contract. The futures contract will expire in 9 months. The underlying asset is a non-dividend paying share that is currently trading at a price of R120 per share. The risk-free interest rate per month is 0.67%. The current futures price is R125, however, the intrinsic or fair value of the futures is estimated to be R127.43. Required: 5.1. Ignoring transaction and other costs, detail the appropriate arbitrage strategy. 5.2. Discuss any two differences between
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question 5 – Futures Arbitrage
You are a financial advisor at Festo Ltd. Your client would like to explore the possibility of an arbitrage opportunity on the following futures contract. The futures contract will expire in 9 months. The underlying asset is a non-dividend paying share that is currently trading at a price of R120 per share. The risk-free interest rate per month is 0.67%. The current futures price is R125, however, the intrinsic or fair value of the futures is estimated to be R127.43.
Required:
5.1. Ignoring transaction and other costs, detail the appropriate arbitrage strategy.
5.2. Discuss any two differences between futures and forwards contracts.
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