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Suppose the S&R index is 1000 and the dividend yield is zero. The continuously compounded borrowing...

Suppose the S&R index is 1000 and the dividend yield is zero. The continuously compounded borrowing rate is 5% while the continuously compounded lending rate is 4.5%. The maturity of the forward contract is 6 months.

(a) If there are no transaction costs (of buying/selling index and futures), and the futures price is 1026. Which of the statement is true?

A. You can do cash-and-carry arbitrage

B. You can do reverse cash-and-carry arbitrage

C. You can do both cash-and-carry and reverse cash-and-carry arbitrage

D. You cannot arbitrage

(b) Following part (a), what is the no-arbitrage lower bound of the forward price?

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