You are examining the S&P 500 on February 21. You can go long or short in a value-weighted portfolio of the stocks in the S&P 500, and you scale the value of this portfolio to equal the spot index value of $2,710. The April S&P 500 futures price on February 21 is $2,765, and the contract will be financially settled on April 21 based on the spot index value. The basket of stocks will pay dividends of $8 on March 21 and $12 on April 21. One-month LIBOR is 2.6% and two-month LIBOR is 2.8%. Is there an arbitrage opportunity? What are the cash flows generated by the arbitrage strategy?

Answer rating: 100% (QA)

To determine if there is an arbitrage opportunity we need to compare the cost of creating the replic... View the full answer