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Alexxandr [17]
3 years ago
12

Problem 3 Suppose that the risk-free interest rate is 10% per annum with continuous compounding and that the dividend yield on a

stock index is 4% per annum. The index is standing at 400, and the futures price for a contract deliverable in four months is 405. What arbitrage opportunities does this create?
Business
1 answer:
Flura [38]3 years ago
7 0

Answer:

Please see explanation

Explanation:

To answer the given question, first we will calculate the theoretical future price which shall be determined using continuous compounding formula as follows:

Theoretical future price=400*e^(10%-4%)*4/12

                                      =$408.08

The actual future price of a contract deliverable in 4 months is only $405 which means that the index future price is too low in relation to the index.

The suitable arbitrage strategy shall be:

1. to purchase the future contracts

2.Short sale the shares which are underlying the index

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Contribution is sales revenue less variable cost. In multiple products environment, it is important that the producer have information about the performance of each product. This is useful for decision making purpose. See income statement below

Explanation:

An income statement showing contribution would suffice:

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                                                                  Income statement

                                                      Weedban Greengrow Total

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4 0
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Answer:

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