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26 September, 15:30

The multiplier for a futures contract on a stock market index is $50. The maturity of the contract is 1 year, the current level of the index is 1,800, and the risk-free interest rate is 0.5% per month. The dividend yield on the index is 0.2% per month. Suppose that after 1 month, the stock index is at 1,820. a. Find the cash flow from the mark-to-market proceeds on the contract. Assume that the parity condition always holds exactly

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  1. 26 September, 17:45
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    Answer:Cash Flow mark to market proceeds = $754.45

    Explanation:

    given:

    stock market index = $50

    current stock index = 1800

    risk free interest rate = 0.5%

    dividend yield=0.2%

    Contract=1 year=12 month

    Solution

    The Current Index value after 12 months ie for future price = Current Stock Index * (1 + Risk Free - Dividend Yield) ^12

    Current Index value after 12 months = 1800 * (1 + 0.50% - 0.20%) ^12

    Current Index value after 12 months = 1865.88

    Also, Future Index value after 1 month = Future Stock Index * (1 + Risk Free - Dividend Yield) ^12-1

    Future Index value after 1 month = 1820 * (1 + 0.50% - 0.20%) ^11

    Future Index value after 1 month = 1880.97

    Therefore, Cash Flow mark to market proceeds = (Future Index Future Value - Current Index Future value) * Multiplier which when variables are imputed gives us

    Cash Flow mark to market proceeds = (1880.97 - 1865.88) * 50

    Cash Flow mark to market proceeds = $754.45
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