a. Suppose the value of the ASX200 is currently 1,500. The six month risk free rate is 3% per annum and the expected dividend yield is 5% per annum.

(i) What is the expected price of the six month futures contract?

(ii) You have invested in a well-diversified portfolio of Australian shares and are concerned that global economic conditions will deteriorate over the next several months. How would you use this futures contract to protect your investment?

(iii) Suppose the futures price for delivery in one year is 1,500. Construct an arbitrate strategy and show that the profits on the arbitrage strategy are equal to the futures market mispricing.

b. It is March 2014 and the September 2014 gold futures contract price is $1,200 while the December gold futures contract price is $1,300. You also observe that the risk free rate is 3%. Is there an arbitrage opportunity and, if so, how would you exploit it?