SE Russell group is a famous British financial institution, providing stock market indices and associated data ervices, such as The Russell 3000/2000/1000 indices to the investors. Among them, the Russell 3000 is a market italization weighted equity index. By tracking the performance of 3000 largest U.S.traded stocks which rosent about 98% of all U.S. incorporated equity securities, it provides exposure to the entire U.S. stock market. While the Russell 2000 index is a smallcap stock market index of the bottom 2,000 stocks in the Russell 3000 index, serving as a benchmark for smallcap stocks in US. To construct the Russell 2000, the index management team of FTSE Russell group uses the market capitalization rank in the last trading day of each January to decide which stock should be kept in this small-cap index or be replaced by other stocks that become a new index component stock due to the increase or decrease of its market capitalization. Due to this specific construction approach, the value of this index may show undesirable changes around the adjustment time. though the fund managers of FTSE Russell group are very careful to avoid such changes, so in most cases this change is very small after considering the transaction costs. However, the construction methodology of this index has a deathful flaw while the financial market is never talented investors. Since Jan 30 of 2018, US market plunged twice with a loss of more than 12%. Large sell -off: run made the market price of Russell 2000 index deviate from its theoretical value constructed on its component stocks. On Feb 2nd, the Russell 2000 index portfolio consisting of reconstructed 2,000 stocks was quoted with 1,493.30 points, meanwhile the E-min Russell 2000 index futures contract with delivery month of Man (suppose exactly one month away from Feb 2nd) has a quoted price f 1,485,35 points. If you are one of these genius investors, please design an arbitrage strategy to capture risk free profits (8 points) The contract size c Emini Russell 2000: $50 X Index points. The riskfree interest rate is 2% per year. SE Russell group is a famous British financial institution, providing stock market indices and associated data ervices, such as The Russell 3000/2000/1000 indices to the investors. Among them, the Russell 3000 is a market italization weighted equity index. By tracking the performance of 3000 largest U.S.traded stocks which rosent about 98% of all U.S. incorporated equity securities, it provides exposure to the entire U.S. stock market. While the Russell 2000 index is a smallcap stock market index of the bottom 2,000 stocks in the Russell 3000 index, serving as a benchmark for smallcap stocks in US. To construct the Russell 2000, the index management team of FTSE Russell group uses the market capitalization rank in the last trading day of each January to decide which stock should be kept in this small-cap index or be replaced by other stocks that become a new index component stock due to the increase or decrease of its market capitalization. Due to this specific construction approach, the value of this index may show undesirable changes around the adjustment time. though the fund managers of FTSE Russell group are very careful to avoid such changes, so in most cases this change is very small after considering the transaction costs. However, the construction methodology of this index has a deathful flaw while the financial market is never talented investors. Since Jan 30 of 2018, US market plunged twice with a loss of more than 12%. Large sell -off: run made the market price of Russell 2000 index deviate from its theoretical value constructed on its component stocks. On Feb 2nd, the Russell 2000 index portfolio consisting of reconstructed 2,000 stocks was quoted with 1,493.30 points, meanwhile the E-min Russell 2000 index futures contract with delivery month of Man (suppose exactly one month away from Feb 2nd) has a quoted price f 1,485,35 points. If you are one of these genius investors, please design an arbitrage strategy to capture risk free profits (8 points) The contract size c Emini Russell 2000: $50 X Index points. The riskfree interest rate is 2% per year
