KIC000064 - then the spot-futures parity relationship...

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. -_.- ._-----------------------_._----- Price of Futures with Parity Since the strategies have the same flows at time T, the futures price has to equal the carrying cost of the stock: F. ~+rrr S. F. =S.(l+rrr Stock Index Contracts Stock index contracts are available on both domestic and international stocks. Advantages over direct stock purchase: ;. Lower transection CD'\t5 };o Better for timing or allocation strategies :;. Takes less time to acquire the portfolio > Ltll~ (I\ ~o, Price of Futures with Parity If a stock. pays a constant dividend D and has a I dividend yieid d ~ DIS.
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Unformatted text preview: then the spot-futures parity relationship becomes: F. = 5 (1 + r f-dY Index Arbitrage • Exploiting m~5f(1 C i~ between underlying stocks and the fit es in contract ~ Futures price is too high: Short the futures and buy the underlying stocks. ,.. Futures price is too low: Long the futures and short sell the underlying stocks. • Difficult to do in practice > Transactions costsaceoftentoo~. }o Trades cannot be done S;M tJ ft:a.f.l orly. :,. Can be approximated through program trading. 100...
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This note was uploaded on 09/07/2011 for the course FINANCE 320 taught by Professor Sapp during the Fall '10 term at Iowa State.

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