Suppose a financial asset, ABC, is the underlying asset for a futures contract with settlement of 6 months from now. You know the following about this financial asset and futures contract in the cash market ABC is selling for $120; ABC pays $18 per year in two semiannual payments of $9, and the next semiannual payment is due exactly 6 months from now; and the current 6-month interest rate at which funds can be loaned or borrowed is 6%. a) What is the theoretical (or equilibrium ) futures price? b) Suppose that ABC pays an interest quarterly instead of semiannually, What would be the theoretical futures price for 3 months settlement? c) Suppose that the borrowing rate is 8% and the 6-month lending rate is 6%, What is the boundary for the theoretical futures price?
3. Suppose a financial asset, ABC, is the underlying asset for a futures contract
with settlement of 6 months from now. You know the following about this financial asset and futures contract in the cash market ABC is selling for $120; ABC pays $18 per year in two semiannual payments of $9, and the next semiannual payment is due exactly 6 months from now; and the current 6-month interest rate at which funds can be loaned or borrowed is 6%.
a) What is the theoretical (or
b) Suppose that ABC pays an interest quarterly instead of semiannually, What would be the theoretical futures price for 3 months settlement?
c) Suppose that the borrowing rate is 8% and the 6-month lending rate is 6%, What is the boundary for the theoretical futures price?
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