Consider a price-weighted index i and a synthetic index, Financial Management

Consider a price-weighted index i and a synthetic index

Consider a price-weighted index (I) and a synthetic index constructed from the constituent stocks (S). The current level of I is 10,000 and the price of S is $10,000. A forward contract on I mature after six months. The continuously compounded interest rate is 5% per year. Stocks constituting S are expected to pay $190 of dividends this year.

If a dealer quoted a forward price $10,231 for S, can you arbitrage this quote? If so, how would you do so and what would your arbitrage profits be?

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Financial Management: Consider a price-weighted index i and a synthetic index

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Financial Management: Consider a price-weighted index i and a synthetic index

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