Question

a. A single-stock futures contract on a non-dividend-paying stock with current price $290 has a maturity of 1 year. If the T-bill rate is 3%, what should the futures price be?

b. What should the futures price be if the maturity of the contract is 6 years?

c. What should the futures price be if the interest rate is 5% and the maturity of the contract is 6 years?

Answer 1

a)Future Price = Current Price*(1+r) = 290*(1+3%) = 298.70
If continuous compounding Future price = Current Price*e^rt = 290*e^3% = 298.83
b) Future Price at 6 years = 290*(1+3%)^6 = 346.28
If continuous compounding Future price = Current Price*e^rt = 290*e^3%*6 = 347.19
c) Future Price = 290*(1+5%)^6 = 388.63
If continuous compounding Future price = Current Price*e^rt = 290*e5^%*6 = 391.46

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