The S&P 500 is currently at a value of 4,130 (as of July 29th, 2022 market close). On the same day, the Dec 22' S&P 500 futures contracts closed out the day at 4,152.25. These contracts mature on Dec 30th 2022 and thus have exactly 5 months remaining until their maturity. The continuously compounded risk-free rate is 2.50% per annum. The yield on the S&P 500 with continuous compounding is 1.52% per annum. What trade do we need to put on to take advantage of this arbitrage opportunity?
The S&P 500 is currently at a value of 4,130 (as of July 29th, 2022 market close). On the same day, the Dec 22' S&P 500 futures contracts closed out the day at 4,152.25. These contracts mature on Dec 30th 2022 and thus have exactly 5 months remaining until their maturity. The continuously compounded risk-free rate is 2.50% per annum. The yield on the S&P 500 with continuous compounding is 1.52% per annum. What trade do we need to put on to take advantage of this arbitrage opportunity?
O A. There is NO arbitrage opportunity available here. The S&P 500 futures are perfectly priced in line with No Arbitrage. Thus, the right arbitrage trade is to do nothing.
O B. Go long the S&P 500 futures, short the S&P 500 Index and invest any excess cash we have at 2.5% interest.
O C. Go short the S&P 500 futures, and borrow any money needed at 2.5% to buy the S&P 500 index.
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