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If the risk-free rate is 4%, market risk premium is 6% and you are interested in...

If the risk-free rate is 4%, market risk premium is 6% and you are interested in a cocoa futures contract with beta of cocoa being -0.291,

a. What is the required annual rate of return on the cocoa contract ?

b. You plan to hold the contract for 3 months only, and take its delivery. At that time you expect the spot price of cocoa will be $900 per ton. What is the present value of this three-month deferred claim ?

c. What should be the proper price of this contract ?

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Homework Answers

Answer #1

Solution:- Given in Question-

Risk Free Return = 4%

Risk Premium = 6%

Beta = -0.291

A. To Calculate Annual Rate of Return as per Capital Asset Pricing Model (CAPM)-

Rate Of Return = Risk Free Return + Beta * Risk Premium

Rate Of Return = 0.04 + (-0.291) * 0.06

Rate Of Return = 2.254%

B. Present value of this three-month deferred claim-

Present Value =

Present Value =

Present Value = $894.96

C. The Proper Price of the Contract is $894.96.

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