Asked by Sondos Alansari on Jul 15, 2024
Verified
If you determine that the DAX-30 Index futures is overpriced relative to the spot DAX-30 Index, you could make an arbitrage profit by
A) buying all the stocks in the DAX-30 and selling put options on the DAX-30 Index.
B) selling short all the stocks in the DAX-30 and buying DAX-30 futures.
C) selling all the stocks in the DAX-30 and buying call options on the DAX-30 Index.
D) selling DAX-30 Index futures and buying all the stocks in the DAX-30.
DAX-30 Index Futures
Financial contracts to buy or sell the DAX 30 index at a future date, used for hedging or speculating on the German stock market.
Spot Index
A real-time index that reflects the current prices of the securities included in the index.
Arbitrage Profit
The gain obtained from the simultaneous purchase and sale of the same or equivalent assets or commodities in different markets or in derivative forms.
- Gain an understanding of the approaches for benefitting from market anticipations and price dynamics through futures.
Verified Answer
DM
Danielle MeerbeekJul 20, 2024
Final Answer :
D
Explanation :
To exploit the overpricing of DAX-30 Index futures relative to the spot DAX-30 Index, one would sell the overpriced futures and simultaneously buy the undervalued stocks in the DAX-30 Index. This creates an arbitrage opportunity where the profit is locked in due to the price discrepancy between the futures and the spot market.
Learning Objectives
- Gain an understanding of the approaches for benefitting from market anticipations and price dynamics through futures.