If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index, you could make an arbitrage profit by
A) buying all the stocks in the S&P 500 and selling put options on the S&P 500 Index.
B) selling short all the stocks in the S&P 500 and buying S&P Index futures.
C) selling all the stocks in the S&P 500 and buying call options on the S&P 500 Index.
D) selling S&P 500 Index futures and buying all the stocks in the S&P 500.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

To exploit the overpricing of S&P 500 Index futures relative to the spot S&P 500 Index, one would sell the overpriced futures and simultaneously buy the underlying stocks in the S&P 500 at their current lower spot prices. This strategy locks in a risk-free profit as the futures price converges to the spot price by the futures contract's expiration.

If You Determine That the S&P 500 Index Futures Is