medium · Market Microstructure mmf-core

A trader observes that the S&P 500 futures price is 5,025 while the calculated fair value (based on cost-of-carry) is 5,020.

If round-trip transaction costs are $3.00, what is the most profitable action?

  1. Buy the futures and sell the cash equity basket.
  2. Sell the futures and buy the cash equity basket.
  3. Buy both futures and the basket to hedge against rising interest rates.
  4. Do nothing, as the discrepancy is within the no-arbitrage band.

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