The multiplier for a futures contract on the stock-market index is $250. The mat
ID: 2810372 • 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 0.3% per month. The dividend yield on the index is 0.2% per month. Suppose that after one month, the stock index is at 805.
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 $
Explanation / Answer
Answer:
(a) The initial futures price is= 800 × (1 + (0.003 - 0.002)*12) = 809.6
In one month, the futures price will be:
F0 = 805 × (1 + (0.003 - 0.002)*11) = 813.855
The increase in the futures price is 4.255, so the cash flow will be:
4.255 × 250 = $1063.75