Question

A futures contract calls for delivery of 1，ppp share of a stock in 1 year. The T-bill rate is 4% per year. the stock pays no dividend. How much should be the futures price if the current stock price is $120？

Answer 1

Solution :

The price of a futures contract that does not pay dividend is calculated using the formula

Futures Price = S0 * ( 1 + r ) t

Where

S0 = Current stock price     ;    r = Risk free rate ;   t = Maturity period or Time to maturity of the contract

As per the information available in the question we have

S0 = $ 120 ;   r = 4 % = 0.04 ; t = 1 year ;

Applying the above information in the formula we have

= $ 120 * ( 1 + 0.04 ) 1

= $ 120 * ( 1 + 0.04 )

= $ 120 * 1.04 = $ 124.80

Thus the futures price should be equal to $ 124.80