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

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
. -_.- ._-----------------------_._----- 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.
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

Ask a homework question - tutors are online