Question

Suppose the value of the S&P 500 stock index is currently 2,000. a. If the 1-year T-bill rate is 3% and the expected dividend yield on the S&P 500 is 1%, what should the 1-year maturity futures price be? Futures price b. What if the T-bill rate is less than the dividend yield, for example, 1%? The T-bill rate is less than the dividend yield, then the futures price should be (Click to select)

Answer 1

a]

Futures price = spot price * e^{(r - d)}

where r = risk free rate

d = dividend yield

Futures price = 2000 * e^{(0.03 - 0.01)}

Futures price = 2040.40

b]

If the T-bill rate is less than the dividend yield, then futures price should be lower than 2000