Is futures contract fairly priced

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You have a diversified portfolio of U.S equities. Your portfolio has a value of $10 million, and a beta of 1.5. Its volatility is 25% per annum, while the volatility of the S&P 500 index is 20% per annum. The current level of the index is 4,450. You would like to hedge you portfolio and have decided to hedge using S&P 500 futures contracts that expires in three months. This futures contract is trading at 4,463 and the value of the contract is $250 times the index. The average dividend yield on the index is 2% per annum and the risk free rate is currently at 1.5% per annum. All rates are continuously compounded.

-Is this futures contract fairly priced?

-If not, design the arbitrage strategy to profit from this mispricing. Show all your positions and cash flows in a table, as in the lectures.

Reference no: EM133068598

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