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4. Sun Board of Trade offers futures contract on Nyakato, Inc. Assume risk free interest rate...

Question

4. Sun Board of Trade offers futures contract on Nyakato, Inc. Assume risk free interest rate...

4. Sun Board of Trade offers futures contract on Nyakato, Inc. Assume risk free interest rate is 0.25% per month and Nakato s

4. Sun Board of Trade offers futures contract on Nyakato, Inc. Assume risk free interest rate is 0.25% per month and Nakato stock sells for $450 per share (a) Find the predicted futures price (on Nyakato) for delivery in 3 months. (5) (b) If the futures price on Nyakato stock in the market is $455.00, is the spot-futures parity relationship violated? If yes, show the strategy and the cash flows at time 0 and at time T (maturity) that can create arbitrage opportunity (as shown in class) (10)

Answers

a)Predicated Futures Price = Spot Price*(1+interest rate)

= 450*(1+0.25%*3)

=$ 453.375 per share

b)yes, the relationship is violated

Borrow $450 and buy on share today

After 3 months, sell the share at $455

Pay off the loan 450(1.025%*3) = $453.375

Arbitrage Gain = $1.625/share


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