1. Suppose you observe the spot S&P 500 index at 1,210 and the three month S&P 500 index futures at fair value of 1,205. Assume there is no arbitrage in this case, you conclude

A. the dividend yield is higher than the risk-free interest rate

B. the spot price is too high relative to the observed futures price

C. this is impossible to happen

D. the dividend yield is lower than the risk-free interest rate

2. In pricing forward contracts, would an increase in dividends yield increase or decrease forward price relative to spot price? Assume that everything else keeps unchanged.

A. increase

B. decrease

C. undetermined

D. no change