Problem 1

Assume the T-bill maturity and futures delivery are on the sameday. Ignore transactions costs.

Treasury Bill

Maturity         DTM              Bid                 Asked                                   

Mar               90                   1.18                1.17                                       

Index Futures

S&P 500 Index (CME)

                       Open              High               Low               Settle

Mar                1,905.00         1,911.00         1,901.00           1,907.70

S&P 500 closed at $1,910.00 on the sameday.

1. Find the discount factor using the T-bill data. Please use the“Bid” yield for the calculation.

1. Suppose that if you buy one unit of S&P 500 index today,you will be entitled to a $10.00 dividend on the delivery day.Consider the following zero-net-investment strategy: buyS&P 500 index spot, borrow at the risk-free rate, and short theS&P 500 futures. Make sure your positions add up to zero att=0. Show the cash flows from all your positions in the followingtable, per unit.

Position	Cash Flow, t=0	Cash Flow, Maturity
Buy S&P 500
Borrow
Short Futures
TOTAL CASH FLOW	0

1. Considering that each S&P 500 futures contract is for 250units of the index, what is your total arbitrage profit per 1000contracts?