Exercise Lecture 1

fwd/futures price Can I answer to the question: is there an arbitrage opportunity? Cash and futures market (mib30; h 11:57 13 feb?)

answer no! I need: contract expiry date; interest rate level and dividend yield

first data... expiry date: 15 mar 02 and 21 jun 02 interest rates:

some necessary math I have to calculate: exp[(r-q)*T]= exp[r*T]*exp[-q*T] Now, exp[r*T]=inverse of the discount factor=1/ = F=30481* *exp[-q*T] F= *exp[-q*T] in our case: F is quoted and it is equal to 30500

... a complicated world then we need to know q. But q is not a tradable good, so we need to find its implied value and think if it makes sense or not implied q: exp[-q*T] =30500/ q*T=log( )= q= / T= / (1/12) implied q= 2.58%

arbitrage decision if we think that q will be 1% (< implied q), I should buy the futures (& sell the stocks). In fact, for me the real value of the futures should be: 30481* * = 30540>F With my strategy, I will pay on March 15, so that if my estimate of q is correct, I will have a net profit of 40