Question: Suppose that the risk-free interest rate term structure is flat 4% per annum with continuous compounding and that the dividend yield on a stock index

Suppose that the risk-free interest rate term structure is flat 4% per annum with continuous compounding and that the dividend yield on a stock index is 1% per annum.

The index is standing at 9,200, and the futures price for a contract deliverable in eight months is 8,900.

Required:

a) Today, what is the theoretical future price F?

b) Today, what arbitrage opportunities does this create? Explain actions to carry it out and calculate the profit.

c) Today, we enter into the future contract deliverable in eight months for an amount of 8,900 and after 2 months, we know that index trades at 8,200 (interest rate and dividend yield are still the same as two months ago).What is the value f of the contract for a long position?

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