A stock index is at 443.35. A futures contract on the index expires in 201 days. The future price of the contract is 458.50. The risk-free interest rate is 6.50%. Value of the dividends reinvested over the life of the futures is 5.0.
a) Show that the futures contract is mispriced.
This part was easy, the value I calculated was 453.99.
b) Show how an arbitrageur can take advantage of this mispricing.
So I know the contract is clearly overpriced. So the actions to take should be:
Short the futures contract
Buy the underlying index
Borrow at 6.50%
I am not sure what to do with dividends at the expiry of the contract??? Do I receive them or pay them over?