Q3 2) Futures (4 marks)

A 1-year futures contract on a non-dividend-paying share is currently traded at $27. The market price of the underlying share is $25. The risk-free rate is 3%.

a). What should the futures price be based on non-arbitrage spot-futures parity? (1 mark)

b). Construct an arbitrage trading strategy to exploit mispricing. In your answer, state the positions taken in each asset needed and explain why it is an arbitrage strategy. Support your explanation with relevant numbers. (3 marks)