Future contracts, parity and arbitrage
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Assume a futures contract exists on Micromedia stock that expires in two months. Micromedia has a current market price of $200, has a beta of 1.15, a 0% dividend yield, and a standard deviation of .33. The current T-Bill rate is 5% annually.
a. Determine what the parity relationship suggests the futures price should be?
b. If the spot price is $202.34, determine if an arbitrage opportunity exists, if so how you would take advantage of it and what your profit would be.
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This solution helps explore financial concepts such as future contracts, parity and arbitrage.
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Answer:
We have,
Current market price=$200
Time =2 month
Beta=1.15
Dividend yield=0%
Standard ...
Education
- MBA, Indian Institute of Finance
- Bsc, Madras University
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