You believe that the spread between the September S&P 500 future and the 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 while buying all the stocks in the S&P 500 will allow the hedge fund to profit from the expected correction in the spread between the futures contract and the index. By selling the futures contract, the hedge fund can capitalize on the difference between the futures price and the actual index price, while buying the individual stocks serves to hedge against the risk of the market moving in the opposite direction. Options strategies could also be used, but they would not provide the same direct exposure to the mispricing that selling futures and buying the underlying stocks would.

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