A Future Contract is an agreement that gives the investor right to buy or sell the underlying assets at a fixed price at a future date. | |||||||||||||||||||||
Single stock future (SSF'S) are future contacts on individually listed shares. They are standardized Contracts with set specification regarding size, expiry dates and delivery. | |||||||||||||||||||||
The future price (F0) IS CALCULATED USING THE FOLLOWING FORMULA : | |||||||||||||||||||||
F0= | S0(1+RF-D)^T …….(1) | ||||||||||||||||||||
HERE, S0 IS CURRENT PRICE OF STOCK, T IS TE MATURITY PERIOD , RF IS THE RATE OF INTEREST AND D IS THE DIVIDEND YIELD. | |||||||||||||||||||||
OneChicago has just introduced a single-stock futures contract on Brandex stock, a company that currently pays no dividends. Each contract calls for delivery of 1,400 shares of stock in 1 year. The T-bill rate is 5% per year. | |||||||||||||||||||||
a. If Brandex stock now sells at $150 per share, what should the futures price be? | |||||||||||||||||||||
FROM (1) | |||||||||||||||||||||
F0= | S0(1+RF-D)^T | ||||||||||||||||||||
F0= | 150 *(1+ .05 -0)^1 | ||||||||||||||||||||
F0= | 157.5 | ||||||||||||||||||||
b. If the Brandex price drops by 3%, what will be the change in the futures price and the change in the investor’s margin account? | |||||||||||||||||||||
New Spot = CURRENT PRICE OF THE STOCK (1 – PRICE DROPS ) | |||||||||||||||||||||
New Spot = $150 (1 – 0.03) | |||||||||||||||||||||
New Spot = $150 x 0.97 | |||||||||||||||||||||
New Spot = $145.50 | |||||||||||||||||||||
New Futures = S0(1+RF-D)^T | |||||||||||||||||||||
New Futures = $145.50 (1.05) | |||||||||||||||||||||
New Futures = $152.775 | |||||||||||||||||||||
The long investor loses | |||||||||||||||||||||
= | future price befor price drops - price drops after prize drops | ||||||||||||||||||||
= | $157.05-$152.775 | ||||||||||||||||||||
= | $4.725 per share | ||||||||||||||||||||
or 6615 per contract { $4.725(1400)} | |||||||||||||||||||||
c. If the margin on the contract is $13,200, what is the percentage return on the investor’s position? | |||||||||||||||||||||
Percentage return | |||||||||||||||||||||
= | investor profit or loss from the contract / margin on the contract | ||||||||||||||||||||
= | 6615 / 13200 | ||||||||||||||||||||
= | 50.11% | ||||||||||||||||||||
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