You are managing an index fund, and are holding a large position in the stocks which make up the index.
Index stocks: Index Future: Borrowing rate: .02
Ask: $36 $36.5 (bid and ask) Lending rate: .01
Bid: $35
Assumptions: The futures contract expires in 9 months; there are no commissions; there is no bid-ask spread on the futures; the Index futures contract settles at 1 times the index stocks' price at expiration, the futures can be settled by physical delivery. Use continuous compounding throughout. There are no dividends paid over the period.
a) You have excess cash which you need to lend out for 9 months. Given the prices below, is it more profitable to lend the money directly or to create an equivalent synthetic position using stocks and stock index futures? Use tables showing the payoffs to compare the two.
b) Given the prices below, is it more profitable to borrow money directly or to create an equivalent synthetic position using stocks and stock index futures? Use tables showing the payoffs to compare the two.