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QUESTION
explain Index Arbitrage, what conditions must exist and how profits are earned through the strategy. To be awarded the most points, a numerical...
explain Index Arbitrage, what conditions must exist and how profits are earned through the strategy. To be awarded the most points, a numerical example should be devised that supports your answer.
Define and explain Index Arbitrage:
a. F<=Se^(r-q)(T-t)
b. F>=Se^(r-q)(T-t)
Use S0 = 1500, ST = 1500, r = 0.05, q = 0, T =1, and F = 1550 for scenario a, and F = 1600 for scenario b.
