Formulate a zero-net-investment arbitrage portfolio

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The one-year futures price on a particular stock-index portfolio is 406, the stock index currently is 400, the one-year risk-free interest rate is 3%, and the year-end dividend that will be paid on a $400 investment in the index portfolio is $5.

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

Reference no: EM13803972

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