If Index Futures Are Priced ____ Relative to the Stocks

question 35

Multiple Choice

If index futures are priced ____ relative to the stocks representing the index, an arbitrageur may ____ index futures and simultaneously ____ stocks.

• A)low; purchase; sell
• B)low; sell; purchase
• C)high; purchase; sell
• D)Answers B and C are correct.
• E)None of the above are correct.

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Definitions:

Factor Rents

Payments for the use of factors of production such as land, labor, and capital, reflecting their income in an economic system.

Total Profit

The overall financial gain made by a business after subtracting all costs from the total revenue.

Producer Surplus

The difference between the amount producers are willing to accept for a good or service compared to what they actually receive, due to market price.

Equilibrium

refers to a state in a market where supply equals demand, and in the broader sense, it's a condition where all forces acting on a system are balanced.