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Question 2. a. Given that the T years market forward price on the index is F. Suppose that an arbitrageur finds out that the market

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Question 2. a. Given that the T years market forward price on the index is F". Suppose that an arbitrageur finds out that the market forward price is overpriced. Given that the initial index price is So, the continuously compounded risk-free rate is r, the dividend yield on the index is r. Name the arbitrage strategy that would the arbitrageur undertake and demonstrate the arbitrage profit today. (7 marks)

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