Question

Suppose that an Intel single-stock futures contract expires in four months. The stock pays a dividend...

Suppose that an Intel single-stock futures contract expires in four months. The stock pays a dividend in two months. We have the following information.

  • Annualized, continuously compounded risk-free interest rate for 2-month period: r = 3.4%.
  • Annualized, continuously compounded risk-free interest rate for 4-month period: r = 6.96%.
  • Current spot price of Intel stock: $29 per share.
  • Dividend per share of $0.38 in two months.

What must the futures price equal in order than no arbitrage opportunity exist?

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Answer #1

Given information,

Current spot price of the stock = $29

Dividend expected in two months = $0.38

To eliminate the possibility of arbitrage the actual Futures contract should be priced at theoretical price of Futures

So we need to findout the theoretical futures price which can be done by multiplying the Present value of spot price with continuous compounding factor

Present value of Spot price = $29 - ( $0.38/e^3.4%)= $28.63

Theoretical Futures price = $28.63*(e^6.96%)= $30.694 ~ $30.7

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