Exam 9: Futures Arbitrage Strategies

Suppose you observe the spot S&P 500 index at 1,210 and the three month S&P 500 index futures at 1,205.Based on carry arbitrage,you conclude

The transaction in which a Treasury bond futures spread is combined with a Fed funds futures transaction is called a

The implied repo rate is similar to the

The implied repo rate is the return on an overnight repurchase agreement.

The opportunity to exercise the quality option will occur when one deliverable bond becomes more favorably priced than another.

The transaction designed to exploit mispricing in the relationship between futures and spot prices is called

A cash-and-carry arbitrage is not risk free unless a repo is available with a maturity equal to the entire life of the transaction.

Find the annualized implied repo rate on a T-bond arbitrage if the spot price is 112.25,the accrued interest is 1.35,the futures price is 114.75,the CF is 1.0125,the accrued interest at delivery is 0.95,and the holding period is three months.

Transaction costs in program trading are so small that they are not much of a factor.

The implied interest rate based on stock index carry arbitrage will increase when the spot price increases,everything else held constant.

If a stock index futures is at 455 and the pricing model says it should be at 458,an arbitrageur should buy the futures and sell short the stock.

What reason might be given for not wanting to hedge the future issuance of a liability if interest rates are unusually high? A)you are locking in a high rate A)the margin cost will be expensive B)transaction costs are higher D)futures prices are lower E)none of the above

Use the following information to answer questions 22 through 24.On October 1,the one-month LIBOR rate is 4.50 percent and the two month LIBOR rate is 5.00 percent.The November Fed funds futures is quoted at 94.50.The contract size is $5,000,000. -All of the following are limitations to Fed funds futures arbitrage,except

The most common means of financing a cash-and-carry arbitrage is a repurchase agreement.

If the stock index is at 148,the three-month futures price is 151,the dividend yield is 5 percent and the interest rate is 8 percent,determine the profit from an index arbitrage if the stock ends up at 144 at expiration.(Ignore transaction costs. )

The settlement price,conversion factor and accrued interest are necessary to calculate the invoice price.

If the invoice price of bond A is 122,the invoice price of bond B is 95,the adjusted spot price of bond A is 127 and the adjusted spot price of bond B is 97,the better bond to deliver is bond B.

Use the following information to answer questions 22 through 24.On October 1,the one-month LIBOR rate is 4.50 percent and the two month LIBOR rate is 5.00 percent.The November Fed funds futures is quoted at 94.50.The contract size is $5,000,000. -The dollar value of a one basis point rise in the Fed funds futures price is

Selling an index futures and holding an undiversified portfolio would eliminate unsystematic risk.

Suppose you observe the spot euro at $1.50/€,the U.S.risk-free interest rate of 3.25% (continuously compounded),and the six month futures price of $1.50/€.Identify the correct implied European risk-free interest rate (select the closest answer).