Q15I

Expert-verified
Found in: Page 590

### Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

# Suppose the S&P 500 Index portfolio pays a dividend yield of 2% annually. The index currently is 1,200. The T-bill rate is 3%, and the S&P futures price for delivery in one year is $1,233. Construct an arbitrage strategy to exploit the mispricing and show that your profits one year hence will equal the mispricing in the futures market. Answer Profit will be of$11.

See the step by step solution

## Step 1: Given information

Based on the input template:

= $1,212.00 But the actual futures price =$1233 i.e. overpriced by $11 (given) ## Step 3: Calculation of arbitrage Buy the stock at spot price of$1,200 using borrowed money of \$1,200 and short future.

 Action Initial cash flow Cash flow at time T (one year) Buy stock -1,200 +(.02 x 1,200) Short future 0 1,233 - ST Borrow 1,200 -1,200 x 1.03 Total 0 11 (riskless cash flow)