1. On a particular day, the September S&P 500 stock index futures was priced at 960.50. The S&P 500 index was at 956.49. The contract ex- pires 73 days later.
a. Assuming continuous compounding, suppose the risk-free rate is 5.96 percent, and the div- idend yield on the index is 2.75 percent. Is the futures overpriced or underpriced?
b. Assuming annual compounding, suppose the U.S. risk-free rate: 7.0 percent Japanese risk-free rate: 1.0 percent
a. Assuming annual compounding, determine whether interest rate parity holds and, if not, suggest a strategy.
b. Assuming continuous compounding, determine whether interest rate parity holds and, if not, suggest a strategy.