IIQE Paper 5 Investment Assets question: investment manager seeking a risk-free arbitrage profit

Answer: D. sell HSI futures and buy the underlying stocks at the same time

Answer: sell HSI futures and buy the underlying stocks at the same time. Arbitrage buys the under-priced asset and sells the over-priced one simultaneously. Here the futures are over-priced, so the manager sells futures and buys the stocks; the two markets converge on settlement.Why not the others:• buy HSI futures only and wait for the index to rise: A one-sided bet on the index is speculation, not a risk-free arbitrage.• sell the underlying stocks only, before the settlement date: Arbitrage needs simultaneous purchase and sale in the two markets; selling stocks alone is a one-sided position.• buy HSI futures and sell the underlying stocks at the same time: This buys the over-priced side and sells the under-priced side, the reverse of arbitrage.Watch out: Reversing the legs: the over-priced side is sold, the under-priced side bought.Rule: Arbitrage is a simultaneous purchase and sale of the same or similar assets in different markets to capture a risk-free profit from mis-pricing.Source: IA Investment-linked Long Term Insurance Examination Study Notes, 2024 Edition (7th ed., Nov 2024; for exams from 17 Feb 2025), 3.4.1(c), p. 3/27