Question

A hypothetical futures contract on a nondividend-paying stock with a current spot price of $170 has a maturity of 1 year. If the T-bill rate is 4%, what should the futures price be? Multiple Choice $176.80 $178.80 $170.00 $163.20

Answer 1

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Correct Answer: a) $176.80

Future Prices can be calculated using,

Future Price = Spot price (1+ risk-free rate)maturity

Since T bills are issued by the government, they are considered to be risk-free and can be a good alternative to the risk-free rate.

Substituting the values,

Future Price = 170 (1+ 0.04)1

Future Price = 170 (1.04)1

Future Price = $ 176.80

Therefore, the future price of non dividend-paying stock is $ 176.80