When an investment asset provides a known dollar

This preview shows page 15 - 26 out of 31 pages.

When an Investment Asset Provides a Known Dollar Income (page 105, equation 5.2) F 0 = ( S 0 I )e rT where I is the present value of the income during life of forward contract 15
Image of page 15

Subscribe to view the full document.

When an Investment Asset Provides a Known Yield (Page 107, equation 5.3) F 0 = S 0 e ( r q ) T where q is the average yield during the life of the contract (expressed with continuous compounding) 16
Image of page 16
Stock Index (Page 110-112) Can be viewed as an investment asset paying a dividend yield The futures price and spot price relationship is therefore F = S e ( r q ) T 0 S 0 e where q is the average dividend yield on the portfolio represented by the index during life of contract 17
Image of page 17

Subscribe to view the full document.

Index Arbitrage 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 18
Image of page 18
Index Arbitrage (continued) Index arbitrage involves simultaneous trades in futures and many different stocks Very often a computer is used to generate the trades Occasionally simultaneous trades are not possible and the theoretical no-arbitrage relationship between F 0 and S 0 does not hold (see Business Snapshot 5.4 on page 112)
Image of page 19

Subscribe to view the full document.

The FTSE/ATHEX-20 cash-futures mispricing -1 0 1 2 -5 -4 -3 -2 2004 2005 2006 2007 2008 2009 Fassas, A. (2011) Mispricing in stock index futures markets – The case of Greece. Investment Management and Financial Innovations , 8(2), pp. 101-107.
Image of page 20
Image of page 21

Subscribe to view the full document.

Image of page 22
BITCOIN arbitrage? TODAY Sell futures @17.800 borrow dollars $16.600 buy bitcoins @16.600 IN JANUARY Sell the bitcoins Pay off the loan pay off the futures (P/L ?) You make more than $1,000 (~10% of the spot price) What's the problem with doing that?
Image of page 23

Subscribe to view the full document.

BITCOIN arbitrage? That trade would require someone comfortable enough to 1. set up a digital wallet to buy and secure bitcoin 2. Sell futures
Image of page 24
Storage costs Maybe the storage costs are $1,000 Oil futures often trade above spot because it costs money to store oil.
Image of page 25

Subscribe to view the full document.

Image of page 26
  • Fall '19

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

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes