Question

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 2,400 shares of stock in 1 year. The T-bill rate is 4% per year.

a. If Brandex stock now sells at $110 per share, what should the futures price be? (Round your answer to 2 decimal places.)

b. If the Brandex price drops by 1%, what will be the new futures price and the change in the investor’s margin account? (Round "Futures price (new)" answer to 3 decimal places and other answer to the nearest dollar amount. Negative amount should be indicated by a minus sign.)

c. If the margin on the contract is $13,600, what is the percentage return on the investor’s position? (Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign.)

Answer 1

a). FV = PV x (1 + r) = $110 x 1.04 = $114.40

b). Current Price = $110 x (1 - 0.01) = $108.90

Futures Price = $108.90 x 1.04 = $113.26

Investor Lose = [$114.40 - $113.26] x 2,400 = $2,745.60

c). % Return = Investor Lose / Contract Value = -$2,745.60 / $13,600 = -20.19%