Consider the futures contract written on the S&P 500 index and maturing in one year. The interest rate is 3.9%, and the future value of dividends expected to be paid over the next year is $19. The current index level is 1,449. Assume that you can short sell the S&P index. a. Suppose the expected rate of return on the market is 8.4%. What is the expected level of the index in one year?
b. What is the theoretical no-arbitrage price for a 1-year futures contract on the S&P 500 stock index?
c. Suppose the actual futures price is 1,452. Is there an arbitrage opportunity here?