Asked by Daniel Candelaria on Jul 12, 2024
Verified
Given a stock index with a value of $1,500, an anticipated dividend of $62 and a risk-free rate of 5.75%, what should be the value of one futures contract on the index?
A) $1,343.40
B) $62.00
C) $1,418.44
D) $1,524.25
Risk-Free Rate
The theoretical rate of return of an investment with zero risk, typically represented by the yield of long-term government bonds.
Stock Index
A measurement of the performance of a group of stocks, which represents a portion of the overall market.
Anticipated Dividend
Expected payment of dividends from a stock, often based on the company's earnings forecasts or past dividend payments.
- Acquire knowledge on the principles of pricing in futures markets.
Verified Answer
AA
Amber AtkinsJul 18, 2024
Final Answer :
D
Explanation :
The value of a futures contract on a stock index can be calculated using the formula: Futures Price = (Spot Price - Dividend) * e^(r*t), where e is the base of the natural logarithm, r is the risk-free interest rate, and t is the time to maturity (assuming t=1 for simplicity). In this case, since no specific time to maturity is given, we simplify the calculation by adjusting the spot price for the dividend and then applying the risk-free rate over a one-year period. Therefore, the calculation is: (1500 - 62) * (1 + 0.0575) = 1438 * 1.0575 = $1,524.25.
Learning Objectives
- Acquire knowledge on the principles of pricing in futures markets.