As fund manager, you have had a tough time this year. Market conditions have been difficult so you have been looking at other avenues besides stock-picking. You think you have identified an arbitrage opportunity However, since Index arbitrage is a new area for your firm, you have to convince your boss that it is riskless. The following information is available:

FBM KLCI = 864 points

3-month KLCI futures = 881.5 points

rf rate (3-mmonth KLIBOR) = 5%

Annual dividend yield for FBM KLCI = 2.5%

a)Is there a sufficient mispricing to enable arbitrage?

b)What is the theoretical fair value of the KLCI futures?

a.864.0

b.885.60

c.874.73

d.869.35

c) What are the appropriate arbitrage strategy?

a.Long 3-month SIF, short spot KLCI, and lend the proceeds from short sale of stock.

b.Short 3 month SIF, long spot KLCI, and lend the proceeds from short sale of stock.

c.Long 3-month SIF, short spot KLCI, and borrow to finance purchase of spot.

d. Short 3-month SIF, long spot KLCI, and borrow to finance purchase of stock.

D)Assuming you could arbitrage up to 10 SIF contracts equivalent, what is the profit attainable.

a.10,260.00

b. 1,026.00
c. 608.31

d.6083.14