Solution: a) Future valuation = 1200 * 1.03= 1236 Hence, Contract mispriced by = XXXXXXXXXX = 18 b) Strategy: Short sale future index at spot and take buy position in stock index future for maturity...

Solution: a) Future valuation = 1200 * 1.03= 1236 Hence, Contract mispriced by = 1236- 1218 = 18 b) Strategy: Short sale future index at spot and take buy position in stock index future for maturity after one year and invest money to earn risk free interest and at maturity (After one year) Stockindex short position will be closed with buy position in stock index future and money invested in risk free investment will be withdrawn and will be used to pay for stock index future. Money remaining will be the arbitrage profit. Cash flow at beginning (T0) = 1200 (Received from short sale) - 1200 (Invested in risk free...