00:02
We have to design a zero net investment arbitrage strategy.
00:06
So you need to consider the following steps first by the index for 3329 you buy one unit.
00:20
Of the s &p 500 index for 3329 then initial cash outflow.
00:41
Minus 3329 then second step.
00:45
We have to short the futures for no cash now.
00:47
So you short the s &p 500 index futures.
01:01
The future settle at 3322 and the s &p 500 closed at 3329 on the same day.
01:28
Now gain on shorting futures is equal to 3329 subtracted from 3322 multiplied by 250.
01:47
So since one future contracts represent 250 units of index, which is equal to 1750 now step 3.
01:56
We need to borrow 3329 at the spot rate.
01:59
So you borrow 3329 at the spot rate.
02:12
No immediate cash flow.
02:22
As you are borrowing.
02:32
Then now let's calculate your profit per one future contract...