You are trying to convince a client about a riskless arbitrage opportunity. The following quotations are available today.

3-month FBM KLCI futures = 864 points

FBM KLCI spot = 600 points

Futures maturity = 90 days

3-month KLIBOR = 4%

Dividend yield = 2% annualized

a) How would you prove to your client that arbitrage is possible?

(5 marks)

b) Show the profit attainable if the index is at 640 points at maturity

(5 marks)

c) How would you convince your client that the profit derived in part (b) is indeed riskless (show computation to prove).

(5 marks)