Stock Index

Stock Index - Stock Index Can be viewed as an investment...

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Stock Index Can be viewed as an investment asset paying a dividend yield. The futures price and spot price relationship is therefore F 0 = S 0 e ( r q ) T where q is the dividend yield on the portfolio represented by the index during life of contract. 1
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Stock Index and quantos For the formula to be true it is important that the index represent an investment asset. In other words, changes in the index must correspond to changes in the value of a tradable portfolio. The CME Nikkei 225 Index is an example of a quanto – derivative whose underlying and payoff are in different currencies. The index (S=spot) is in yen and the underlying is actually in dollars. 2
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When F 0 > S 0 e(r-q)T an arbitrageur buys the stocks underlying the index and sells futures. When F 0 < S 0 e(r-q)T an arbitrageur buys futures and shorts or sells the stocks underlying the index.
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This note was uploaded on 01/19/2012 for the course FIN 4520 taught by Professor Lucyackert during the Spring '12 term at Kennesaw.

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Stock Index - Stock Index Can be viewed as an investment...

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