1. Suppose the current level of the S&P 500 is 1225. The risk-free interest rate per year is 3%. Assume negligible dividends. The 3-month S&P 500 futures contract is trading at 1234.09. Is there an arbitrage opportunity? Briefly explain.

Select one:

1. There IS NOT an arbitrage opportunity. The 3-month futures contract is trading below the fair price of 1243.24
2. There IS an arbitrage opportunity. The 3-month futures contract is trading below the fair price of 1243.24.
3. There IS NOT an arbitrage opportunity. The 3-month futures contract is trading at the fair price of 1234.09.
4. There IS an arbitrage opportunity. The 3-month futures contract is trading above the fair price of 1231.08.