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Derivative Securities Analysis

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You are considering the S&P 500 futures contract on the 1st November 2010, the S&P was trading at 1127,17 when futures contracts maturing on 1st March 2011 were priced at 1119,70. The annualized interest rate is 1,25% and the annualized dividend yield is 2,16%

a) What is the theoretical value of the futures contract? Show all working.

b) Given the market price of S&P 500 contract, is arbitrage possible? Describe the transactions that should be undertaken and calculate the profit that would be made per contract of the S&P 500 futures. Show all steps.

c) If transaction costs are 1,5% (round trip) per futures, calculate the upper and lower bound of the futures price. Also, is arbitrage still possible once transaction costs are taken into account?

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This solution explores derivative securities analysis for S&P 500 futures contract.

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Given that,
S&P 500 current price=$1127.17
Price of S&P 500 future contract=$1,119.70
Annualized interest rate=1.25%
Dividend yield=2.16%
Time to maturity=4 months=1/3 years
(a) We ...

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  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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