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Suppose today S&P 500 index is 1800 and the continuously compounded annual dividend yield on...

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Finance

Suppose today S&P 500 index is 1800 and the continuously compounded annual dividend yield on the index is 2%.

Assume that it is possible to lend at 4 % and borrow at 7 %, annually continuously compounded.

a) Above what futures price is there arbitrage?

b) Below what futures price is there arbitrage?

Please show the cash flows, which make each type of arbitrage and explain what you would

do at each relevant date. Consider time to maturity of 6 months

.

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