Formulate a zero-net-investment arbitrage portfolio

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Suppose the 1-year futures price on a stock-index portfolio is 1,624, the stock index currently is 1,600, the 1-year risk-free interest rate is 3%, and the year-end dividend that will be paid on a $1,600 investment in the market index portfolio is $20.

a. By how much is the contract mispriced?

b. Formulate a zero-net-investment arbitrage portfolio and show that you can lock in riskless profits equal to the futures mispricing.

Reference no: EM132001645

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