D assuming the customer is willing to trade at your

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d) Assuming the customer is willing to trade at your offer, please describe the steps you would take to create $1 billion of DIAMOND ETFs. Question 2 The XYZ pension fund (U.S. based)wishesto invest $100 million in an S&P 500 index fund. The fund has approval to trade futures and exchange traded funds. Its investment horizon is one year. Below is the relevant information needed to make an informed investment decision: S&P 500 = 1,121.6 3-month LIBOR (annual rate) = 0.3% 3-month T-Bill (annual rate) 1 = 0.05% S&P 500 Div Yield (annual rate) = 2.1% 3-month S&P 500 Futures = 1,116 ETF Price = 112.16 Futures Multiplyer = 50 1 Assume spread between T-Bills and LIBOR is the same for one year as three months 1
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Historical Calendar Spread Mispricing * Trade-weighted average mispricing Source: Goldman Sachs Estimated Transaction Costs: Commissions Liquidity Shortfall Management Fee ETF 2.5 cents per share 3 basis points 10 basis points per year Futures $5 per contract 3 basis points* * For initiating position, zero for calendar spread trades a) What is the Fair Value of the 3 month futures contract? b) Where is the actual contract trading in relation to Fair Value (in bps)? c) Over the past year, has the calendar spread been rich or cheap in relation to Fair Value? How rich or cheap? How does your conclusion changeif you look at it over the last six months? d) Assuming you believe the pricing of the calendar spread over the next year will be similar to what we observed over the last six months, would you recommendbuying ETFs or S&P 500 futures if the fund reinvests its cash at LIBOR plus 25 bps? Why? Please show all supporting calculations. e) What if their reinvestment rate was the Treasury Bill rate? Lets now add the fact that a swaps dealer is willing to offer an S&P 500 total return index swap for one year for a spread of LIBOR plus 25 bps. f) Assuming again the fund reinvests its cash at LIBOR plus 25 bps, would you prefer ETFs, futures or trading an S&P 500 index swap?
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