The risk-free interest rate drops but the futures on a stock market index rises.Which of the following statements is the most accurate?
A)There are arbitrage profits to be made by going long futures,short spot,and investing.
B)There are arbitrage profits to be made by going short futures,long spot,and borrowing.
C)The futures is overvalued but this may or may not mean an arbitrage opportunity is available.
D)There is not enough information in the question to identify if there is an arbitrage or not.

Question

Quizplus · Accepted Answer

The question does not say what happened to the spot level of the index when interest rates fell.If the index rose by enough to more than compensate for the fall in interest rates,the arbitrage-free level of futures could well stay the same or increase.

The Risk-Free Interest Rate Drops but the Futures on a Stock