On a particular day, the September S&P 500 stock index futures was priced at 1450.50. The S&P 500 index was at 1375.40. The contract expires 60 days later. Remember that the S&P futures contract has a $250 multiplier.

a. Assuming continuous compounding, suppose the risk-free rate is 3.90 percent and the dividend yield on the index is 2.70 percent. Is the futures overpriced or underpriced? Show work and discuss.

b. Assuming annual compounding, suppose the risk-free rate is 4.60 percent and the future value of dividends on the index is $6.20. Is the futures overpriced or underpriced? Show work and discuss.