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Assignment_1Answers - Assignment1...

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Assignment 1 Johnson Graduate School of Management  Due on September 14, 2010 Professor Mark Zurack Question 1 In the Assignment 1 Spreadsheet under Session 4 in Angel, included are closing prices on Oct. 20, 2009 for all  of the stocks in the Dow Jones Industrial Average (DJIA). a) Given the DJIA closed at 10,041.48 on Oct. 20, what was its divisor that day? b) You are an ETF trader and have been asked to price a $1 billion trade on a DJIA ETF (which is  commonly referred to as a “DIAMOND”).  The DIAMOND ETF closed on Oct. 20 at 1/100 of  the value of the DJIA index.  Please construct the portfolio you need to trade in order to create $1  billion of ETFs before transactions costs are accounted for. c) You believe that your execution shortfall cost to buy each of the 30 stocks in the DJIA in order to  construct the $1 billion portfolio is 10 cents per share.  Where should you price the ETF to break  even in trading (assume your profit comes in the form of commissions)? d) Assuming the customer is willing to trade at your offer, please describe the steps you would take  to create $1 billion of DIAMOND ETFs. Answer : 1
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= 100.4148 x 1.0023 Historical Calendar Spread Mispricing As of 10/20 Stock Close Pri  Shares Check AA 13.79 752,876 10,382,160 AXP 35.42 752,876 26,666,868 sum of pri
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