Question

1. Suppose that you enter into a six-month forward contract on a non-dividend-paying stock when the stock price is $30 and the risk-free interest rate (with continuous compounding) is 12% per annum. What is the forward price? 2. A stock index currently stands at 350. The risk-free interest rate is 8% per annum (with continuous compounding) and the dividend yield on the index is 4% per annum. What should the futures price for a four-month contract be?

Answer 1

1.

where,

S= Current spot price of underlying asset

r= risk-free interest rate

e= mathematical irrational constant=2.7183

t= delivery date in years

Forward price=$31.86.

Therefore, the forward price is $31.86.

2. The futures price will be given by

where,

S= Current spot price of underlying asset

r= risk-free interest rate

e= mathematical irrational constant=2.7183

q= dividend yield

T-t= Time until maturity of the contract

F= $354.7

Therefore, the futures price is $354.7.