1. The most recent futures settlement price is $94 per $100 face value. The following three bonds are available for delivery under this futures contract:

Bond 1: Quoted price 100, conversion factor 1.05

Bond 2: Quoted price 143, conversion factor 1.5

Bond 3: Quoted price 115, conversion factor 1.2

Which of these bonds is the cheapest-to-deliver bond?

	a.	Bond 1
	b.	Bond 2
	c.	Bond 3

2, You see an attractively priced futures contract on an equity index. Your calculations suggest that the futures price should be $135, but the observed price is $130. You decide to design an arbitrage strategy to take advantage of the apparent mispricing. What positions should you take to make arbitrage profits on a zero net investment today?

	a.	Buy the underlying equity index and borrow the needed funds at the risk-free rate. This is a zero net investment strategy, and the spot price should go up, so you will make money.
	b.	Buy the futures contract only. Since no cash exchanges hands at the time of entering a futures contract, this will be a zero net investment strategy, and you have no risk because the futures price will go up and you will make money.
	c.	Sell the futures contract; buy the underlying equity index; borrow at the risk-free rate.
	d.	Buy the futures contract; short the underlying index; invest the proceeds from selling the index at the risk-free rate.