Assume that NSE-50 Index futures are traded with rupee value being Rs.100 per Index point on 15th September, the Index closed at 1195 and December futures (last trading day December 15) were trading at 1225. The historical dividend yield on the Index has been 3% and 3 M T-bill yield was 9.5%.

QUESTIONS: (15 MARKS)

a. Determine whether on September 15 the futures were underpriced or overpriced.

b. What arbitrage transaction was possible to gain out this mispricing?

c. Calculate the gains and losses if the index on 15th December closes at (i)1260 (ii) 1175