Question

The risk-free rate is 5% and the dividend yield on the S&P 500 index is 2%. Which of the following is correct when a futures option on the index is being valued?

		The futures price of the S&P 500 is treated like a stock paying a dividend yield of 5%.
		The futures price of the S&P 500 is treated like a stock paying a dividend yield of 2%.
		The futures price of the S&P 500 is treated like a stock paying a dividend yield of 3%.
		The futures price of the S&P 500 is treated like a non-dividend-paying stock.

Answer 1

Solution:-

The correct Answer is point A i.e. The futures price of the S&P 500 is treated like a stock paying a dividend yield of 5%

When Future Option is valued the dividend yield which is equal to the risk free Rate. In the Given Case, risk free Rate is 5% which are Given in Question.

Hence, the Correct Answer is point A i.e. The futures price of the S&P 500 is treated like a stock paying a dividend yield of 5%.

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