Asked by Clara Candelario on Jul 23, 2024
Verified
If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index, you could make an arbitrage profit by
A) buying all the stocks in the S&P 500 and selling put options on the S&P 500 Index.
B) selling short all the stocks in the S&P 500 and buying S&P Index futures.
C) selling all the stocks in the S&P 500 and buying call options on the S&P 500 Index.
D) selling S&P 500 Index futures and buying all the stocks in the S&P 500.
E) None of the options are correct.
S&P 500 Index
A stock market index that measures the stock performance of 500 of the largest companies listed on stock exchanges in the United States.
Arbitrage Profit
Earnings realized from buying and selling the same asset in different markets to take advantage of differing prices for the same asset.
- Gain insight into the essence and utility of futures contracts and their application in financial markets.
Verified Answer
LP
Leywes PierreJul 23, 2024
Final Answer :
D
Explanation :
To exploit the overpricing of S&P 500 Index futures relative to the spot S&P 500 Index, one would sell the overpriced futures and simultaneously buy the underlying stocks in the S&P 500 at their current lower spot prices. This strategy locks in a risk-free profit as the futures price converges to the spot price by the futures contract's expiration.
Learning Objectives
- Gain insight into the essence and utility of futures contracts and their application in financial markets.