The stock index is currently at 750. The one-year interest rate is 6% and the dividend yield on the stock index is 2%. The settlement price on an index futures contract with a 1-year maturity is 770. Note that exp(0.02) 1.0202 and exp(0.06) = 1.0618. Assume that one unit of the stock index equals one dollar. An arbitrageur can realize a profit: (a) by shorting the index, investing 750, and entering into the futures contract long. (b) by borrowing 750, buying the index, and entering into the futures contract short. (c) by shorting the index, borrowing 750, and entering into the futures contract long. (d) by buying the index and selling it at maturity (e) by borrowing 750, buying the index, and entering into the futures contract long.
