The Risk-Free Interest Rate Drops but the Futures on a Stock

question 4

Multiple Choice

The risk-free interest rate drops but the futures on a stock market index rises.Which of the following statements is the most accurate?

• A)There are arbitrage profits to be made by going long futures,short spot,and investing.
• B)There are arbitrage profits to be made by going short futures,long spot,and borrowing.
• C)The futures is overvalued but this may or may not mean an arbitrage opportunity is available.
• D)There is not enough information in the question to identify if there is an arbitrage or not.

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Definitions:

Preferred Stock

A type of stock that gives holders priority over common stockholders in terms of dividend payments and claims on assets in the event of liquidation.

Stock Dividend

A form of dividend payment made by a company to its shareholders in the form of additional shares, rather than cash.

Paid-In Capital

The capital received by a company from investors in exchange for stock, representing funds raised beyond the par value of the shares issued.

Paid-In Capital in Excess of Par

The amount of capital received from investors for stock, in excess of the par value of the shares.