Question

\One Chicago has just introduced a new single stock futures contract on the stock of Brandex, a company that currently pays no dividends. Each contract calls for delivery of 2,000 shares of stock in one year. The T-bill rate is 5% per year.

a. If Brandex stock now sells at $220 per share, what should the futures price be? (Round your answer to 2 decimal places.)

Futures price

b. If the Brandex stock price drops by 1.0%, what will be the change in the futures price and the change in the investor's margin account? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places.)

New futures price
Investor's margin account

c. If the margin on the contract is $30,000, what is the percentage return on the investor's position? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Percentage return

%

Answer 1

a. The price is computed as shown below:

= current price x (1 + risk free rate)

= $ 220 x 1.05

= $ 231

b. New future price is computed as follows:

= $ 220 x (1 - 0.01) x (1 + risk free rate)

= $ 220 x 0.99 x 1.05

= $ 228.69

Change in margin is computed as follows:

= $ 231 - $ 228.69

= $ 2.31

So, the investor's loss will be as follows:

= $ 2.31 x 2,000 shares

= $ 4,620

c.% return is computed as follows:

= Loss / Margin

= $ 4,620 / $ 30,000

= 15.40%

So, the investor has earned a return of - 15.40%.

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