On a particular day, the September S&P 500 stock index futures was priced at 960.50. The S&P 500 index was at 956.49. The contract expires 73 days later.
a. Assuming continuous compounding, suppose the risk-free rate is 5.96 percent, and the dividend yield on the index is 2.75 percent. Is the futures overpriced or underpriced?
b. Assuming annual compounding, suppose the risk-free rate is 5.96 percent, and the future value of dividends on the index is $5.27. Is the futures overpriced or underpriced?