Question

OneChicago has just introduced a single-stock futures contract on Brandex stock, a company that currently pays no dividends. Each contract calls for delivery of 1,800 shares of stock in 1 year. The T-bill rate is 4% per year.

a. If Brandex stock now sells at $130 per share, what should the futures price be?

b. If the Brandex price drops by 1%, what will be the new futures price and the change in the investor’s margin account?

c. If the margin on the contract is $11,400, what is the percentage return on the investor’s position?

Answer 1

Future Price = Spot Price*(1+R_f)^t

Spot price = 130

R_f = 4%

t = 1 year

a.

Future Price = 130*(1.04)¹ = 135.2

b.

Price drop by 1%, new price = 130 - 1% = 128.7

New Future Price = 128.7(1.04) = 133.85

Change in Future Price = 135.2 - 133.85 = 1.35

Change in Margin = 1.35*1800 shares = 2430

c.

Margin = 11400

Suppose investor goes short on Future.

After a price drop of 1%, the investor gains 2430(calculated above)

Return = 2430/11400 = 21.32%

If the investor goes long on futures, his return will be -21.32%