Question

A single stock futures contract on a nondividend-paying stock
with current price $140 has a maturity of one year.

**a.** If the T-bill rate is 4.4%, what should the
futures price be? **(Round your answer to 2 decimal
places.)**

Futures price
$

**b.** What should the futures price be if the
T-bill rate is still 4.4% and the maturity of the contract is three
years? **(Do not round intermediate calculations. Round your
answer to 2 decimal places.)**

Futures price $

**c.** What if the interest rate is 5.7% and the
maturity of the contract is three years? **(Do not round
intermediate calculations. Round your answer to 2 decimal
places.)**

Futures price $

Explanation:

**a.**

*F*_{0} = *S*_{0}(1 +
*r _{f}*) = $140 × 1.044 = $146.16

**b.**

*F*_{0} = *S*_{0}(1 +
*r _{f}*)

**c.**

*F*_{0} = *S*_{0}(1 +
*r _{f}*)

Answer #1

(a)

Future price formula = Spot rate * (1 + Risk free rate)^n

maturity (n)= 1 year

Spot rate = 140

risk free rate= 4.40%

So, future price = 140*(1+4.4%)^1

146.16

So, future price of contract should be $146.16

(b)

maturity (n)= 3 year

Spot rate = 140

risk free rate= 4.40%

So, future price = 140*(1+4.4%)^3

159.3050458

So, future price of contract should be $159.31

(b)

maturity (n)= 3 year

Spot rate = 140

risk free rate= 5.70%

So, future price = 140*(1+5.7%)^3

165.330507

So, future price of contract should be $165.33

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