4.The S&P 500 is currently priced at $2900. It has a dividend yield of 1.80% (on

Question

4.The S&P 500 is currently priced at $2900. It has a dividend yield of 1.80% (on a continuously compounded basis). The risk free rate is 1.50% (on a CC basis). Where should S&P 500 futures be trading 9 months out?

5.What is a “conversion factor”?

6.The December 10-year US Treasury note is currently priced at $127. The following bonds are eligible for delivery into the contract with the following conversion factors. Please calculate the delivery prices for each bond ignoring accrued interest:

a. 2% of 11/26 CF=.75         _______________________

b. 2.25% of 2/27 CF=.76      _______________________

c .2.375% of 5/27 CF=.77   _______________________

Explanation / Answer

4.

Spot Price = 2900

Dividend yield (D)= 1.8%

Risk free rate (Rf)= 1.5%

Time (t) = 9 months = 9/12 years

For contineous compounding :

Future Price = Spot price * e^((Rf - D)*t)

Future Price = 2900 * e^((0.015 - 0.018)*(9/12))

Future Price = 2893.48

5.

If you have long position in bond future for a particular bond but at delivery, the other party (short position) deliver bond other than the agreed bond,then you will not pay the price which was agreed upon and you will recalculate it. It is recalculated as on initiation date and it should be divided by FACTOR to attain the price. That factor is called conversion factor.

This factor is there to make sure than cheap or costly bonds are delivered accordingly

6.

10 Year US Treasury note Price = 127

a) Conversion factor of 2% 11/26 Bond = 0.75

Price = 127 / 0.75 = 169.33

b) Conversion factor of 2.25% 2/27 Bond = 0.76

Price = 127 / 0.76 = 167.10

a) Conversion factor of 2.375% 5/27 Bond = 0.77

Price = 127 / 0.77 = 164.93

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