hard · Market Microstructure
The S&P 500 index is at $5,000. The risk-free rate is 5%, the dividend yield is 1.5%, and a futures contract expires in 60 days.
If the observed futures price is $5,035 and round-trip transaction costs are $3.0 index points, is there an arbitrage opportunity?
- No, because $5,035 is within the no-arbitrage band.
- Yes, buy the futures and sell the cash basket.
- Yes, sell the futures and buy the cash basket.
- Yes, but only if the dividend yield increases.
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