ier for a futures contract on a stock market index is $65. The maturity of the c

Question

ier for a futures contract on a stock market index is $65. The maturity of the contract is 1 year, the current level of the index is 1830, and the risk free interest rate is 07% per month. The dividend yield on the index is 0 4% per month Suppose that after 1 month, the stock index is at 1,850 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 $5.300 (Round your answer to 2 decimal places) Holding period return

Explanation / Answer

(a) Cash flow from the mark-to market proceeds on the contract.

Futures price = Index level * (1+(r-d))n

where,

r = risk free interest rate

d = Dividend yield

n = number of months (time period)

Old Futures current price = $1,830 * (1+(0.007-0.004)12 = $1,897

New Futures price (1 month later) = $1,850 * (1+(0.007-0.004)11  = $1,912

Cash flow = (New Future price - Old futures price) * Contract multiplier

Contract muultiplier given is $65

Hence Cash flow = ($1,912-$1,897) * $65 = $975

(b) Holding Period return = Cash Flow/ Initial Margin = $975/$5,300 = 0.183962 or 19.4%

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