Question

(Cash Settlement.) Futures on the S&P 500 are cash settled by the CME using the opening price of each stock in the index on its primary exchange on the settlement date. These opening prices are then weighted according to each stock's weight in the index to arrive at the "special opening quote." Note that this quote does not correspond to the first (or last, or perhaps any) reported value of the index during that day. Agree or disagree with the following statement, carefully explaining your reasoning. The settlement procedure used by the CME makes cash-and-carry arbitrage of the SeP 500 futures impossible.

Answer 1

I agree with the statement that the settlement procedure used by the CME makes cash-and-carry arbitrage of the S&P 500 futures impossible. The settlement procedure is based on a cash settlement mechanism that makes use of opening price of each stock in the index. This use of price is reliable and publicly available and hence arbitrage opportunities are almost diminished or extinguished. Also cash settlement ensures that the futures market is not subject to manipulation as well.