NOTE: PLEASE DO NOT INCLUDE EXCEL. PEN AND PAPER BECAUSE IT IS A PRACTICE FOR TESTS. I NEED TO UNDERSTAND THE FORMULAS. THANK YOU

1. As the manager of a large pension fund you have just received $10 million in additional contributions to invest. Currently, the S\&P 500 is at 275 . The six-month futures contract on the index is at 285 . The six-month T-bill rate is 8 percent per year, and the dividend yield on the index is 3 percent per year. If you wish to commit $10 million to the market, are you better off doing it directly by purchasing the securities that make up the index, or doing it through a long position in the futures contract? (Differential transactions cost on these two arrangements can be ignored.)