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CMA Final · Strategic Financial Management · Forwards and Futures

Spot index is 10,000, and 3-month futures are quoted at 10,300. The simple interest rate is 8% p.a. and the index yields dividends of 4% p.a. (simple). A trader can borrow and lend at the risk-free rate, ignoring transaction costs. What is the arbitrage profit per unit of index from the best strategy?

The arbitrage profit is ₹200 per unit. Fair futures price is 10,000 × (1 + 4% × 3/12) = 10,100, using net carry of interest 8% less dividend yield 4%. Futures are quoted at 10,300, so buy spot and sell futures to earn 10,300 − 10,100.

  1. A₹100Correct
  2. B₹200
  3. C₹300
  4. D₹0

Explanation

Fair futures = 10,000 × (1 + (0.08 − 0.04) × 3/12) = 10,000 × 1.01 = 10,100. Quoted futures 10,300 is overpriced, so buy spot (borrowed) and sell futures, locking in 10,300 − 10,100 = ₹200. Check: Cost = 10,000 + 200 interest = 10,200, less dividend 100 = 10,100; profit 10,300 − 10,100 = 200. So the correct profit is ₹200, not ₹100.

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