Question

Consider the futures contract written on the S&P 500 index and maturing in one year. The interest rate is 4.2%, and the future value of dividends expected to be paid over the next year is $19. The current index level is 1,433. Assume that you can short sell the S&P index. a. Suppose the expected rate of return on the market is 8.4%. What is the expected level of the index in one year?

Answer 1

Answer:

$1,534.372

Explanation:

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

= Current index level × 1 + expected rate of return on the market - expected future value of the dividend paid over the next year

= $1,433 × (1 + 8.4%) - $19

= $1,553.372 - $19

= $1,534.372

We simply applied the above formula so that the expected level of the index in one year could come