Question

The multiplier for a futures contract on a stock market index is $50. The maturity of the contract is 1 year, the current level of the index is 1,800, and the risk-free interest rate is 0.5% per month. The dividend yield on the index is 0.2% per month. Suppose that after 1 month, the stock index is at 1,820. a. Find the cash flow from the mark-to-market proceeds on the contract. Assume that the parity condition always holds exactly. (Round intermediate calculations to 2 decimal places.)

Answer 1

Answer:

The cash flow mark to market proceeds = $754.45

Explanation:

The current index value after 12 months = current stock index * (1 + risk free - dividend yield)^12

= 1800 * (1 + 0.50% - 0.20%)^12

The current index value after 12 months = 1865.88

The future index value after 12 months = future stock index * (1 + risk free - dividend yield)^12

= 1820 * (1 + 0.50% - 0.20%)^11

The future index value after 12 months= 1880.97

The cash flow mark to market proceeds = (future index future value - current index future value) * multiplier

= (1880.97 - 1865.88) * 50

The cash flow mark to market proceeds = $754.45