Question

Consider the futures contract written on the S&P 500 index and maturing in one year. The interest rate is 5.8%, and the future value of dividends expected to be paid over the next year is $21. The current index level is 1,453. Assume that you can short sell the S&P index. a. Suppose the expected rate of return on the market is 11.6%. What is the expected level of the index in one year?

Answer 1

Answer:

$1,600.55

Explanation:

The computation of the expected level of the index in one year is shown below:

= Current index level × (1 + expected rate of return) - expected dividend in the next year

= $1,453 × (1 + 11.6%) - $21

= $1,621.55 - $21

= $1,600.55

We simply applied the above formula by considering the items shown above i.e current level index, expected rate of return, and the expected dividend in the next year