Answer The initial cash outflows of this position is 51 the purchase price of

Answer the initial cash outflows of this position is

This preview shows page 9 - 10 out of 10 pages.

Answer: The initial cash outflows of this position is $51, the purchase price of the stock, and the payoff of such position will be between two boundaries, $48 and $56. The maximum profit will thus be: $56 $51 = $5 (3 marks) The maximum loss will be: $48 $51 = $3 (3 marks) S T 35 40 Payoff Profit3 2 Value 0 40 35 (2)A one year gold future contract is selling for $1641. Spot gold price is $1700 and the one-year risk-free interest rate is 2%. What arbitrage opportunity is available to investors? What arbitrage strategy should they use, and what will be the profits on the strategy? (6 marks)Answer: The theoretical futures price = S0 (1+ rf)T= $1,700 (1 + .02) = $1,734. At $1,641, the gold futures contract is underpriced. To benefit from the mispricing, we sell gold short $1,700 today, lend the money at risk-free rate, and long gold future of $1,641. One year from today well have cash inflows from the loan of $1,734 and the proceeds from future position of (ST$1,641), and outflow to close the short position of gold at spot price (ST). The arbitrage profit is thus $1,734 + (ST$1,641) + (ST) = $93. Question 5 (12 marks) a. Answer the following two questions concerning portfolio risk/return measures versus the risk/return measures of the individual securities that make up the portfolio. Assume all weights are positive. 1) Can the return on the portfolio ever be less than the lowest return on an individual security in the portfolio? 2) Can the variance of the portfolio ever be less than the lowest variance of an individual security in the portfolio? (3 marks) b. What is the difference in cash flow between short-selling an asset and entering a short futures position? (3 Marks) Short selling results in an immediate cash inflow, whereas the short futures position does not:
Background image
Action Initial Cash Flow Cash Flow at Time T Short sale +S0STShort futures 0 F0STc. Differentiate between the Primary Market and the Secondary Market for stock markets. (3 marks) d. Differentiate between the Close-end mutual fund and the Open-end mutual fund. (3 marks)
Background image

You've reached the end of your free preview.

Want to read all 10 pages?

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes