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Stock Index

In: Business and Management

Submitted By Knightwish
Words 292
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The theoretical price of the MMI March ’86 futures contract is(Assume 23 days):
PV[S(T)]=S(t)-PV(3.41)=311.74-3.41*e^(-0.068*23/365)=308.34
F(t,T)=308.34*e^(0.068*23/365)=309.67
Theoretical price= 309.67
Market future price= 313.55
Spot price today=311.74
Assume that Jim is subject to a $5,000,000 position limit:

Cash Flow at t
Cash Flow at T
Borrow money
311.74*110%=342.91
-342.91*e^(0.068*23/365)= -344.38
Margin payment
311.74*10%=-31.17
31.17
Buy underlying
-311.74
S(T)+3.41*(311.74/1374.50)=S(T)+0.77
Short future
0
313.55-S(T)
Total
0
313.55-344.38+31.17+0.77=1.11

Since Jim is subject to a $5,000,000 position limit, he will back 5000000/311.74=16039Units.
Thus, he can make profit from this arbitrage opportunity about 16039*1.11=$17803.29.
The rate of return Jim expects to earn is: (17803.29-transcation cost)/5,500,000= (17803.29*99.75%)/5,500,000=0.32%
People who want to protect their assets against the risk of interest rate fluctuation. People who want to get arbitrage opportunity.
People who are speculator.
When we comparing the differences between the theoretical price and the market future price, we could exploit the arbitrage opportunity depend whether the difference is positive or negative. When the theoretical price is lower than the market future price, we could buy underlying at low price and short sell the future contract. Compare to the MMI, S&P 500 will have a higher likelihood of having a counter party.…...

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