Question

9. 10.00 points value: The multiplier for a futures contract on a certain stock market index is $250. The maturity of the contract is year, the current level of the index is 1,500, and the risk-free interest rate is 0.3% per month. The dividend yea on the index is 02% per month. Suppose that after one month, the stock index is at 1529. a. Find the cash flow from the mark-to-market proceeds on the contract. Assume that the parity condition always holds exactly. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Cash flow $ b. Find the holding-period return if the initial margin on the contract is $20,000. (Do not round intermediate calculations. Round your answer to 2 decimal places) Holding-period return Worksheet on futures positions as a function of current and eventual futures

Answer 1

Answer to Part a:

Initial Future Price, F0 = 1,500 * (1 + 0.003 – 0.002)^12
Initial Future Price, F0 = 1,500 * 1.001^12
Initial Future Price, F0 = 1,518.10

Future Price after 1 month:
F1 = 1,529 * (1 + 0.003 – 0.002)^11
F1 = 1,529 * 1.001^11
F1 = 1,545.90

Increase in Future Price is 27.80 (1,545.90 – 1,518.10), so
Cash Flow = 27.80 * $250
Cash Flow = $6,950.00

Answer to Part b:

Holding Period Return = $6,590 / $20,000 * 100
Holding Period Return = 32.95%