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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.

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

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

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