An investment bank engages in index arbitrage for its own and customer accounts. On a particular day, the S&P Index at the NYSE is at 602.25 when the futures contract for delivery in 90 days is 614.75. If the annualized 90-day interest rate is 8.00% and the annualized dividend yield is 3.00%, would program trading involving stock index arbitrage take place? If so calculate the arbitrage profit and demonstrate the strategy.
Firstly, is this contract 90/360 days or 90/365 day? Surely it is an equity contract therefore it should be 90/365?
Secondly, how do you calculate the dividends? I know the yield is given but do you have to calculate the 90-day yield?