If the futures price is ________ the theoretical futures price (that is, the futures contracts are cheap), the index fund manager can ________ the indexed portfolio's return by buying the futures and buying the Treasury bills.

Question

Quizplus · Accepted Answer

If the futures price is less than the theoretical futures price, the futures contracts are considered cheap. In this scenario, the index fund manager can enhance the indexed portfolio's return by buying the cheap futures contracts and investing in Treasury bills. This strategy is known as cash and carry arbitrage, which involves buying an asset in the spot market and selling futures contracts on the same asset. By doing so, the manager can lock in a profit by exploiting the price difference between the spot market and the futures market.

If the Futures Price Is ________ the Theoretical Futures Price