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 3% per year.

a. If Brandex stock now sells at $230 per share, what should the futures price be? (Round your answer to 2 decimal places.)

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.)

c. If the margin on the contract is $20,000, 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.)

Answer 1

a. Futures Price = Spot Price * (1 + Risk Free Rate)

Futures Price = 230 * (1 + 0.03)

Futures Price = $236.90

b. New Spot Price = Current Spot Price * (1 - Drop) = 230 * 99% = $227.70

New Futures Price = New Spot Price * (1 + Risk Free Rate)

New Futures Price = $227.70 * (1 + 0.03)

New Futures Price = $234.53

Change in Investor Account = Shares * Difference in Futures Price = 2000 * (234.53-236.90)

Change in Investor Account = Shares * Difference in Futures Price = $4738

c.Percentage Return = Loss / Margin = -$4738/20000 = -23.69%

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