Question

4. Forward and Futures Prices A. (6 points) Suppose the stock price is $35 and the continuously compounded interest rate is 5%. What is the 6-month forward price, assuming dividends are zero? B. (6 points) If the forward price is $35.50, what is the annualized continuous dividend yield? 5. Forward and Futures Prices Suppose you are a market-maker in S&R index forward contracts. The S&R index spot price is 1100, the risk-free rate is 5%, and the dividend yield on the index is 0. A. (6 points) What is the no-arbitrage forward price for delivery in 9 months? B. (6 points) Suppose a customer wishes to enter a short index futures position. If you take the opposite position, demonstrate how you would hedge your resulting long position using the index and borrowing or lending. C. (6 points) Suppose a customer wishes to enter a long index futures position. If you take the opposite position, demonstrate how you would hedge your resulting short position using the index and borrowing or lending.

Answer 1

4]

A]

Forward price = spot price * e^(r-d)*t,

where r = continuously compounded interest rate,

d = annual continuous dividend yield

t = time to maturity in years. In this case, this is 0.5, since there are 6 months to maturity.

Forward price = $35 * e^{(0.05 - 0)*0.5}

Forward price = $35.89.

B]

Forward price = spot price * e^(r-d)*t

$35.50 = $35 * e^{(0.05 - d)*0.5}

e^{(0.05 - d)*0.5} = ($35.50 / $35)

(0.05 - d) * 0.5 = LN(35.50 / 35)

(0.05 - d) * 0.5 = 0.014185

d = 0.05 - (0.014185 / 0.5)

d = 4.72%