Chapter 17, Problem 15PS

Summary Introduction

Adequate information:

Current S&P 500 index price = $2,000

S&P Future Price = $2,030

T-bill or Risk-free rate = 3%

Dividend yield = 2%

To construct:

Construct an arbitrage strategy to exploit mispricing.

Introduction:

Arbitrage strategy is an investment strategy where traders take advantage of mispricing due to price differentials in contracts at a particular time to book gain in the market without any risk considerations.