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Chapter 22] The S&P portfolio pays a dividend yield of 1% annually. Its current value is 1,300. The T-bill rate is 4%. Suppose the S&P futures price...

Chapter 22] The S&P portfolio pays a dividend yield of 1% annually. Its current value is 1,300. The T-bill rate is 4%. Suppose the S&P futures price for delivery in 1 year is 1,330. Construct an arbitrage strategy to exploit the mispricing and show that your profits 1 year hence will equal the mispricing in the futures market.

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First calculate the value of the future contract and check, if there is any mispricing. If yes, we will need to determine the... View the full answer

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Position
Initial Cash - flow
Cash - flow at delivery
Short Index
51, 300
-51, 3:43
= = 1-157 - 10. 01*)
51, 3.0017)
Buy Futures
50
50
= =\57 - 51, 330)
Invest in T- bills
- 51300
51, 352
= [51, 300...

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