1. Consider one year futures price of ASX500 index is 4450. The stock index is currently 4400. The one year risk free rate is 3% and the index is currently paying dividend of 2%.

a. Is the contract mispriced? If so by how much is the contract mispriced? (2 marks)

b. Draw a table using a zero -net investment arbitrage portfolio and show that you can lock in riskless profits equal to the futures mispricing. Show your work in detail by clearly outlining the actions, initial cash flow and cash flow at maturity (T). (7 marks)

2. a. A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn. What are the farmer's net proceeds from the sale of corn? (2 marks)

b. Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the futures contracts? (1 mark)