If a stock index futures contract is overpriced,you would exploit this situation by:
A)selling both the stock index futures and the stocks in the index.
B)selling the stock index futures and simultaneously buying the stocks in the index.
C)buying both the stock index futures and the stocks in the index.
D)buying the stock index futures and selling the stocks in the index.
E)None of the above.

Question

Quizplus · Accepted Answer

Selling the overpriced stock index futures means that the investor expects the price to decrease in the future. To exploit this situation, they should simultaneously buy the underlying stocks in the index, which are undervalued in comparison to the futures contract. This way, the investor can profit from the expected price correction and minimize their risk. Options A, C, and D involve buying or selling either the futures contract or the stocks in the index, which would not take advantage of the overpricing of the futures contract. Therefore, option B is the best choice.

If a Stock Index Futures Contract Is Overpriced,you Would Exploit