Arbitrage profits an investor told are risk less profits
Subject: Business / Finance
Question
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Q5. “Arbitrage profits” an investor told are risk less profits. You take simultaneous but opposite positions in two markets to reap gains from pricing disparities. Acting on this belief, his friend tried to find the arbitrage profit by trading simultaneously in futures and stock index.
He has collected to the following information:
• Pricing level of stock index _- 3000
• Index futures priced at 2000
• Risk free rate of return – l0%p.a.
• 50% stocks are to pay dividcnds at 6%
• The index futures has a multiple of 100
• The future has six months to expiration.
Required
(a) Find arbitrage profits, if any.
