You believe that the spread between the September S&P 500 future and S&P 500 index is too large and will soon correct.To take advantage of this mispricing a hedge fund should ______________.

Question

Quizplus · Accepted Answer

Selling S&P 500 index futures and buying all the stocks in the S&P 500 allows for a profit if the spread between the futures and index narrows. If the spread does in fact decrease, the hedge fund can profit from the decrease in the futures price while also profiting from the increase in the value of the stocks in the S&P 500. This strategy takes advantage of the anticipated correction in the spread between the futures and index. Option A and B involve selling or buying options, which involves additional risks and costs. Option D involves selling short all the stocks in the S&P 500, which increases the risk if the market goes up.

You Believe That the Spread Between the September S&P 500