(A)
Adequate Information:
Indexed equity portfolio value - $9 million
Indexed contract price - $1800
Contract multiplier - $250
To Compute:Number of contracts to fully utilize indexed equity portfolio over six-months period.
Introduction:
The number of contracts to fully utilize indexed equity portfolio is the total value of portfolio/ indexed future contract value where indexed future contract value is al agreement the value predetermined stock on a predetermined future date listed on stock market index.
Contract multiplier is the minimum number of index or stock that inflates the value of the future contract value to add leverage to the trade.
(B)
Adequate Information:
Current price/spot price - $1800
Dividend yield rate - 1% semi annual
Risk-free interest rate - 2% for 6 months
Time period to maturity - 6 months
To calculate:
The parity value of future price.
Introduction:
The Spot-Futures parity theory for future price of the contract states that if an asset purchased today and held until the maturity of the futures contract, the value of the future contract is equal to the current spot price adjusted for the variables such as interest
Future price=Spot price X (1 + Risk free interest rate - dividend yield)^ time period in years
(C)
To show:
If the contract is fairly priced, the returns on total risk free proceeds are equal to the T-bill rate.
Introduction:
Fair value is theoretical value of future stock index contract on the basis of current index value, interest rates, dividends and days to maturity of the futures contract.
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Chapter 17 Solutions
EBK ESSENTIALS OF INVESTMENTS
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