An ETF investing in the S&P 500 index pays a 1% annual dividend yield (continuously compounding)...

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An ETF investing in the S&P 500 index pays a 1% annual dividend yield (continuously compounding) and is currently traded at $1,300. The 3-month futures contract on this S&P 500 ETF is currently traded at $1,310 and each contract is for only one underlying ETF. The annual risk-free rate is 5% (compounded continuously for either depositing or borrowing). a) What is the theoretical price of this futures contract on the S&P 500 ETF? b) The difference between this theoretical price and the actual price ($1,310) is the potential arbitrage profit. Describe your arbitrage strategy if you can take a long or short position in ONE futures contract and another position in ONE underlying ETF? (Hints: do not forget the interest rate.) c) How much will you get (net arbitrage profit) on the expiration date of the futures contract (3 months later)? (Hints: interest rate is compounded continuously and do NOT forget to pay your broker.) An ETF investing in the S&P 500 index pays a 1% annual dividend yield (continuously compounding) and is currently traded at $1,300. The 3-month futures contract on this S&P 500 ETF is currently traded at $1,310 and each contract is for only one underlying ETF. The annual risk-free rate is 5% (compounded continuously for either depositing or borrowing). a) What is the theoretical price of this futures contract on the S&P 500 ETF? b) The difference between this theoretical price and the actual price ($1,310) is the potential arbitrage profit. Describe your arbitrage strategy if you can take a long or short position in ONE futures contract and another position in ONE underlying ETF? (Hints: do not forget the interest rate.) c) How much will you get (net arbitrage profit) on the expiration date of the futures contract (3 months later)? (Hints: interest rate is compounded continuously and do NOT forget to pay your broker.)

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a Theoretical Price of the Futures Contract The theoretical price of a futures contract can be calculated using the costofcarry model which takes into ... View the full answer