Question

As of 9:35:00AM this morning (September 24, 2020), a hedge fund offered to enter into cashsettled

one-month NDFs on the S&P 500 stock index at an index value of 3,250 (forward price = 3,250).

The underlying asset (the S&P 500 stock index) was quoted at 3,248 at the very same time. Given that

the annualized dividend yield on a S&P 500 portfolio is currently 1.92%, and given that this NDF matures

in 1 month, what is a likely explanation for the trader’s quote? Choose an answer & explain briefly.

(i) There is an arbitrage opportunity: the NDF is underpriced for sure

(ii) There is an arbitrage opportunity: the NDF is overpriced for sure

(iii) There is no arbitrage opportunity if the annualized 1-month risk-free rate is close to 1.92%

(iv) Not enough information

(v) None of the above

2. Assume away transactions costs. Based on the information in part (a), can you calculate the 1-

month interest rate that would rule out arbitrage? Explain briefly and show your work.

(i) Yes, and the answer is ______

(ii) No, there is not enough information. I would need to know ______________________________

Answer 1

question 1 -

option 1 is correct

question 2-

option 2 is correct since the question does give the information about how to calculate i.e weather monthly ou quaterly or compoundly .