FINA2322ABCD Derivatives
Tutorial 3
Problem Set 3 Question 1
Suppose the current stock price of the Walt Disney Company is $50 and you can enter a
forward contract (long or short position) to buy 50’000 stocks in 9 months for $51 each. The
Walt Disney stock is expected to increase to $53 in 9 months. The 9-month (risk free) spot
rate is 3% (c.c.).
(a) Is there an arbitrage if Walt Disney does not pay dividends? If so, carefully describe a
possible arbitrage strategy. What should the forward price be in a world without
arbitrage?
(b) Suppose the 3-month (risk free) spot rate is 2.75%. Is there an arbitrage if Walt
Disney pays a dividend of $0.75 in 3 months? If so, carefully describe a possible
arbitrage strategy. What should the forward price be in a world without arbitrage?
Problem Set 3 Question 4
The expected return of the Dow Jones Industrial Average index is 5.5% per year, its dividend
yield is 0%, the yield curve is flat and the risk-free interest rate is constant and equals 2%
(c.c.).
(a) In general, do you expect speculators to take long or short positions in DJIA forwards
and futures? Explain.
(b) There is a forward contract with 9 months to maturity written on $1’000 times the
DJIA index points at maturity. Given there is no arbitrage, what is the forward price
of the contract if the DJIA is currently at a level of 13000 index points?
(c) Consider you have entered a short position in the forward contract in question b).
What is the value of your position 3 months later if the DJIA has increased to 13001
index points? What if the DJIA has increased to 14500 index points?