Loose-Leaf Essentials of Investments
Loose-Leaf Essentials of Investments
10th Edition
ISBN: 9781259604966
Author: Kane, Alex, Marcus Professor, Alan J., Bodie Professor, Zvi
Publisher: McGraw-Hill Education
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Chapter 17, Problem 2PS
Summary Introduction

Adequate Information:

Current price/spot price - $1800

Dividend yield rate - 2%

Risk-free interest rate - 1%

Time period to maturity - 1 year

To Compute:

Price of Futures Contract

Introduction:

The price of the futures contract can be calculated using Spot-Futures parity theory which states that if an asset purchased today and held until the maturity of the futures contract, the value of the future is equal to the current spot price adjusted for the variables such as interest rate, dividends, etc. In simple mathematical equation:

Future price=Spot price X (1 + Risk free interest rate - dividend yield)^ time period in years

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