Assume that the current level of a stock market index is valued at $16 000 and ܴ௙=22.5% and the stock market is known with a dividend yield of 12%with a delivery date of 3 months from today. a) Given...

Assume that the current level of a stock market index is valued at $16 000 and ܴ௙=22.5% and the stock market is known with a dividend yield of 12%with a delivery date of 3 months from today.

a) Given that the dividend is paid on the expiry date, calculate the value of the futures contract using the stock index method;

b) Assuming that the price of the actual index turns out to be $16 600,

i) Determine if an opportunity for arbitrage profit exists on the markets;

ii) If so, show the cash flows of the index arbitrage transaction today and at the delivery date if the index turns out to be worth $12 000 or $20 000.