Question

The multiplier for a futures contract on a certain stock market index is $50. The maturity of the contract is one year, the current level of the index is 2,000, and the risk-free interest rate is 0.2% per month. The dividend yield on the index is 0.1% per month. Suppose that after one month, the stock index is at 2,040. 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 $5,000. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Holding-period return %

Answer 1

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Answer:

Calculation of cash flow from market to market proceeds on contract is shown below
Future price of contract today	2000*(1+0.002-0.001)^12
Future price of contract today	$2,024.13
Future price after one month	2040*(1+0.002-0.001)^11
Future price after one month	$2,062.55
Increase in future price	38.42
Cash flow	50*38.42
Cash flow	$1921.00
b.
Holding period return	1921/5000
Holding period return	38.42%