IMBA 533- Derivative Markets and Alternative Assets
Instructor: Dr. Cetin Ciner
Project 2
1) On a particular day, the September S&P 500 stock index futures was priced at 960.50. The S&P
500 index was at 956.49. The contract expires 73 days later.
a. Assuming continuous compounding, suppose the risk free rate is 5.96 percent, and the
dividend yield on the index is 2.75 percent. Is the futures overpriced or underpriced?
b. Assuming annual compounding, suppose the risk-free rate is 5.96 percent, and the future
value of dividends on the index is $5.27. Is the futures overpriced or underpriced?
2) The following information was available:
Spot rate for Japanese yen: $.009313
730-day forward rate for Japanese yen: $.010475 (assume a 365-day year)
US risk free rate: 1.10 percent
Japanese risk free rate: 1.0 percent
a. Assuming annual compounding, determine whether interest rate parity holds and, if not,
suggest a strategy.
b. Assuming continuous compounding, determine whether interest rate parity holds and, if not,
suggest a strategy.
3) On July 5, a stock index futures contract was at 394.85. The index was at 392.54, the risk free rate
was 2.83 percent, the dividend yield was 2.08 percent, and the contract expired on September 20.
Determine if an arbitrage opportunity was available and explain what transactions were executed.
4) On August 20 a stock index futures, which expires on September 20, was priced at 429.70. The
index was at 428.51. The dividend yield was 2.7 percent. Discuss the concept of the implied repo
rate on an index arbitrage trade. Determine the implied repo rate on this trade, and explain how
you would evaluate it.