Question
a) On 1 October 2021 LIFFE FTSE100 index futures with 90 days to maturity were trading at 4,180 index units when the spot index level
a) On 1 October 2021 LIFFE FTSE100 index futures with 90 days to maturity were trading at 4,180 index units when the spot index level was 4,100 units. Treasury Bills with three months to maturity were selling at a quoted discount of 4%. The present value of the dividends expected over the next three months on the FTSE100 index basket of stocks was 35 index units.
i) Was the future contract priced as per the theoretical arbitrage valuation model? Show your calculations.
ii) If the futures contract mentioned in part i) is mispriced, describe in detail a riskless arbitrage strategy that would have exploited this mispricing, stating all obligations and incidence of cash flow over time and the amount of profit that you would make.
iii) State your assumptions for the above calculations.
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