If the S&P 500 Index Futures Contract Is Overpriced Relative

question 87

Multiple Choice

If the S&P 500 Index futures contract is overpriced relative to the spot S&P 500 Index, you should ________.

• A) buy all the stocks in the S&P 500 and write put options on the S&P 500 Index
• B) sell all the stocks in the S&P 500 and buy call options on S&P 500 Index
• C) sell S&P 500 Index futures and buy all the stocks in the S&P 500
• D) sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

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Definitions:

Variable Costs

Costs that change in proportion to the level of goods or services that a business produces.

Profit-maximizing Output

The level of production at which a firm achieves the highest profit, where marginal revenue equals marginal cost.

Marginal Cost

The expenditure required to produce an extra unit of a good or service.

Fixed Cost

A cost that does not change with an increase or decrease in the amount of goods or services produced.