5.12. Suppose that the risk-free interest rate is 10% per annum with continuous compounding and that the dividend yield on a stock index is 4% per annum. The index is standing at 400, and the futures price for a contract deliverable in four months is 405. What arbitrage opportunities does this create?

• Actual Price = 405
• Arbitrage Strategy: Long future contract and short shares underlying the index

Action	Cash Flow t	Cash Flow T
Short 1 Share of the Stock
Long forward contract to buy one share in 6 months for $408.08
Invest $405 at 10% rate for 4 months
Total