1. This is a problem that has TWO questions. Therefore, please choose TWO answers (one choice for each question) to get full credit for this questions, otherwise you will only get partial points.

   Suppose that the risk-free interest rate is 8% per annum with continuous compounding and that the dividend yield on a stock index is 3% per annum with continuous compounding. The index is standing at 350 and the futures price for a contract deliverable in 6 months is 360.

   #1) What should be the theoretical futures price for the stock index?

   #2) What arbitrage opportunities does this create?

   		#1) theoretical futures price = $366.38
   		#1) theoretical futures price = $358.86
   		#1) theoretical futures price = $355.87
   		#1) theoretical futures price = $368.35
   		#2) long futures contracts, and short the shares underlying the index
   		#2) long futures contracts, and buy the shares underlying the index
   		#2) short futures contracts, and short the shares underlying the index
   		#2) short futures contracts, and buy the shares underlying the index