Actuarial Outpost Question #21 on SOA website
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 Investment / Financial Markets Old Exam MFE Forum

#1
11-12-2018, 12:45 PM
 smarterthancandee Member Non-Actuary Join Date: Aug 2015 Location: Harrisburg, Pennsylvania Studying for MFE College: BU Alumna Favorite beer: Butterbeer Posts: 43
Question #21 on SOA website

The answer they give is since the forward price should be 110*e^(.05-.02)*.5 = 111.66, you sell the forward and buy the synthetic forward and the profit is 112-111.66 = .34.

my problem with this is: The synthetic forward is buy the index & borrow. So you would borrow 110 and then at the end of six months, you would owe 110*e^.05*.5 = 112.78. And in those six months you would have earned dividends of 110*(1-e^.02*.5) = 1.106. So once you subtract those off,
you owe 112.78- 1.106 = 111.68. But then you can sell the stock for 112 and have a profit of 112-111.68 = .32
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VEE: Mathematical Statistics, Economics, Accounting & Finance
#2
11-12-2018, 01:59 PM
 tkt Member CAS SOA Join Date: Jun 2011 Location: Des Moines College: Drake University Posts: 509

See if the following Adapt solution helps:

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#3
11-12-2018, 02:22 PM
 smarterthancandee Member Non-Actuary Join Date: Aug 2015 Location: Harrisburg, Pennsylvania Studying for MFE College: BU Alumna Favorite beer: Butterbeer Posts: 43

okay, so they're buying less than 1 share, thank you!
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P FM MFE STAM LTAM SRM PA
VEE: Mathematical Statistics, Economics, Accounting & Finance