Continuous compounding and the dividend yield on stock index

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Reference no: EM131020044

The risk-free interest rate is 10% per year with continuous compounding and the dividend yield on a stock index is 4% per year. The index is standing at 400, and the futures price for a contract deliverable in four months is 405. What should an arbitrager do if an arbitrage opportunity exists?

a. Do nothing because there is no arbitrage opportunity

b. Buy futures contracts and short sell the underlying index

c. Buy futures contracts and buy the underlying index

d. Sell futures contracts and short sell the underlying index

e. Sell futures contracts and buy the underlying index

Reference no: EM131020044

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