Question: 2. Using the numbers from question l, show the arbitrage profits to 10 contracts if you arbitrage the spot price of $3,368.38 and the

2. Using the numbers from question l, show the arbitrage profits to

2. Using the numbers from question l, show the arbitrage profits to 10 contracts if you arbitrage the spot price of $3,368.38 and the June 2021 futures contract of 3,356.75. Assume the risk-free rate is 1.5% and the dividend yield on the S&P is 1.5% (Note: you can assume t = 16 months). (8 points) Ifr = q = .015, then So simplifies to Fo = So So compare the futures price to the spot price to figure out the arbitrage: (Futures) 3,356.75 x 50 x 10 < 3,368.38 x 50 x 10 (Spot) and the arbitrage is to sell short and buy back in the future Time 0 Borrow S&P 500 and sell short Invest in Rf Enter 10 long futures @ 3,356.75 Net 0 0 Time 1 Principal from investment Interest from investment Buy stock futures Pay dividends Return borrowed stock Profit 34,023 -1,678,375 -34,023 5,815

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