On Feb. 1st, you observe the following: * The spot S&P 500 price is $3,875. * There exists a March S&P 500 futures contract with a price of $3,824. Each contract calls for delivery of 50 shares of the S&P 500. * The stocks in the S&P 500 are expected to pay 1.00% dividends from today until the delivery day of the futures contract. * The Treasury bill rate from today until the delivery day of the futures contract is 0.20%. * The cost of short selling in the (spot) stock market from today until March is 1% of today's spot value. This cost is paid today when you start the short sale.

A) Are there arbitrage opportunities for investors WHO DO NOT OWN S&P 500 stocks and must short sell them? If yes, design the arbitrage and calculate the profits. Explain. (2 points)

B) You are the manager of the mutual fund S&P 500 indexed that OWNS S&P 500 shares with a current market value of $155 million. Is there an investment strategy that will ALWAYS beat the return on the S&P 500? If yes, design the strategy and calculate the profits ABOVE the S&P. (4 points)

C) Is the TOTAL return on the strategy designed in (b) riskless? Is ANY COMPONENT of the return on this strategy riskless? Explain. (2 points)