The multiplier for a futures contract on the stock-market index is $250. The mat
ID: 2793199 • Letter: T
Question
The multiplier for a futures contract on the stock-market index is $250. The maturity of the contract is one year, the current level of the index is 800, and the risk-free interest rate is 0.6% per month. The dividend yield on the index is 0.3% per month. Suppose that after one month, the stock index is at 815.
a. Find the cash flow from the mark-to-market proceeds on the contract. Assume that the parity condition always holds exactly. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Cash flow $
b. Find the one-month holding-period return if the initial margin on the contract is $20,000. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Holding-period return %
Explanation / Answer
a.
Initial future price = 800 * (1 + 0.006 - 0.003)12
= 800 * (1.003)12
= 829.28
Future price = 815 * (1 + 0.006 - 0.003)11
= 815 * (1.003)11
= 842.30
Increase the future price 13.02 (842.30 - 829.28)
Cash flows = 250 * 13.02
= $3255.
b. Holding period return = $3255 / $20000
= 0.1627 or 16.27%.