Suppose the value of the SP 500 Stock Index is currently 175

Suppose the value of the S&P 500 Stock Index is currently $1,750. If the one-year T-bill rate is 5.3% and the expected dividend yield on the S&P 500 is 4.6%.

a. What should the one-year maturity futures price be? (Do not round intermediate calculations.)

Futures price            $

b. What would the one-year maturity futures price be, if the T-bill rate is less than the dividend yield, for example, 3.6%? (Do not round intermediate calculations.)

Futures price            $

Solution

a. the one-year maturity futures price = 1750* e^0.053-0.046 = 1762.29

b. the one-year maturity futures price = 1750 * e^0.036-0.046 = 1732.59