You are the chief investment officer (CIO) of a boutique investment management company. You are currently reviewing two of your firms funds: a resource/mining sector portfolio and a financial sector portfolio. The resource fund has R176 million invested in various mining and resource shares and R48 million in cash, and a beta of 1.57. The financial sector fund is somewhat larger with R 274 million in equities and R112 million in cash, with a beta of 0.92. The fund manager of the resource sector fund is generally bullish on the prospects of the mining counters and wishes to increase his allocation. By contrast, the financial sector fund manager has a negative outlook. He feels that bad debts are likely to increase and the impact of Covid-19 and the related lockdowns have done more damage to businesses than has been anticipated by the market. Consequently, the profitability of the entire sector will decline. However, he is confident that in the longer term, it makes strategic sense to maintain a weighting to the SA financial shares. The benchmark for the resource fund is the JSE RESI Index, which is currently at 54364.73 and has an annual dividend yield of 4.1%. The FINI is the benchmark for the financial fund and the index is currently at 11183.72, with an annual dividend yield of 3.55%. The current risk-free rate is 5.7 % p.a. Both fund managers have a 4-month outlook. Hence, they will trade RESI and FINI futures with 4-months until maturity. Note, both the RESI and FINI futures contracts have a multiplier of 10. a) As the CIO, what futures trades would you recommend to each portfolio manager? Briefly substantiate your answer. (4 marks) b) Given your recommendations above, how many futures contracts should be traded for the resource fund and the financial fund respectively? Assume that both funds are allowed a maximum equity allocation of 90% and a minimum of 40%. Show all calculations. (10 marks) c) Briefly discuss how basis risk might influence the expected performance of futures trade strategy of the resource fund and the financial fund if the basis strengthens or weakens? (5 marks) d) If the RESI futures contracts were priced at 55580.35, is there an arbitrage opportunity? If yes, describe the steps undertaken to initiate the trade and the anticipated net profit. If there is no arbitrage opportunity, demonstrate this by showing there are zero profits to be made. Show all calculations. (6 marks)