This question is about futures risk premia. Consider a two period economy.You can buy stocks in period 0, and then sell them in period 1. You can also enter into futures contracts in period 0, which expire in period 1. Since buying single-stock futures appears to be a fairly profitable trade, you decide to invest in a futures strategy. You enter a long futures contract position. You also invest cash in period 0 at the risk-free rate, so you have just enough to pay for the futures contract at expiration. You plan to sell the stock just after expiration. What is the expected return on this trading strategy (in terms of expected period-1 dollars you get, per period-0 dollar invested)?

This question is about futures risk premia. Consider a two period economy.You can buy stocks in period 0, and then sell them in period 1. You can also enter into futures contracts in period 0, which expire in period 1. Since buying single-stock futures appears to be a fairly profitable trade, you decide to invest in a futures strategy. You enter a long futures contract position. You also invest cash in period 0 at the risk-free rate, so you have just enough to pay for the futures contract at expiration. You plan to sell the stock just after expiration. What is the expected return on this trading strategy (in terms of expected period-1 dollars you get, per period-0 dollar invested)?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

ChapterP1: Part 1: Integrative Problem: The International Financial Environment

Section: Chapter Questions

Problem 5Q

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