Problem: You are considering the S&P 500 futures contract on the 1st November 2010, the S&P was trading at 1127,17 when futures contracts maturing on 1st March 2011 were priced at 1119,70. The annualized interest rate is 1,25% and the annualized dividend yield is 2,16%
Q1. What is the theoretical value of the futures contract? Show all working.
Q2. Given the market price of S&P 500 contract, is arbitrage possible? Describe the transactions that should be undertaken and calculate the profit that would be made per contract of the S&P 500 futures. Show all steps.
Q3. If transaction costs are 1,5% (round trip) per futures, calculate the upper and lower bound of the futures price. Also, is arbitrage still possible once transaction costs are taken into account?