Exhibit 21.5
Use the Information Below for the Following Problem(S)
The S&P 500 stock index is at 1100. The annualized interest rate is 3.5% and the annualized dividend is 2%.
-Refer to Exhibit 21.5.If the futures contract was currently available for 1250,indicate the appropriate strategy that would earn an arbitrage profit.
A) Long futures, and short the index.
B) Short futures and long the index.
C) Long futures and long the index.
D) Short futures and short the index.
E) None of the above.

Question

Quizplus · Accepted Answer

Since the futures contract is trading above its theoretical value the appropriate strategy would be to short the futures contract and go long the index.

Exhibit 21.5 Use the Information Below for the Following Problem(S)