Assignment: One specialized type of security is called an equity futures. This i

Question

Assignment:

One specialized type of security is called an equity futures. This is a contract that guarantees you a share of a particular company to be delivered to you not today, but sometime in the future, at a price that is determined by the market right now.  This price is usually called the futures price of the stock (note - the term is plural - "futures"). If you 'buy' this futures, you don't pay for the shares now. You are actually signing a contract whereby you are committed to pay that price in a particular date in the future, and you are guaranteed to receive one share of the company at that time, irrespective of its actual market price at that future date.  Suppose for example that the futures price of the XYZ company is $40. Suppose you 'buy' a 6-months futures contract. If six months later the share price is $45, you gain $5 per share. If the market price in 6 months is only $35, then you lose $5.

Using the Yahoo Finance take a look at the five year chart for your reference company (the one you chose for SLP1).  Using this chart and other information you can find on this company, write a paper answering the following question:

What do you think would the futures price of 100 shares of your reference company to be delivered to you in one year be right now?  

Assignment Expectations:

The paper is to be two pages long.  You DO NOT need to use complex mathematical formulas for this assignments. Instead, think about how much do you think the market value of 100 shares of your company will be in one year? In considering the possible answer please reflect also on the following:

Do you expect the price of the shares in one year to be much higher? Or lower? Or only a little bit higher?

How risky the stock is. Is its price prone to wild swings up and down? Or has the price been relatively stable the last few years?

What alternative investments you have access to. What rate does your bank give you on a savings account or certificate of deposit?  The greater return you can get on other investments, the less you would be willing to pay for an equity future.

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Explanation / Answer

In finance, a futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed today (the futures price or strike price) with delivery and payment occurring at a specified future date, the delivery date. The contracts are negotiated at a futures exchange, which acts as an intermediary between the two parties.
An option contract is a type of contract that protects an offeree from an offeror's ability to revoke the contract. Consideration for the option contract is still required as it is still a form of contract. Typically, an offeree can provide consideration for the option contract by paying money for the contract or by providing value in some other form such as by rendering other performance or forbearance. See consideration for more information.

Objectives of the study:

1. To highlight the key elements of future contracts and options.
2. To give a proper description about the feature of future contracts and options.
3. To find out different sectors of future contracts and options.
4. To find out the future contracts and options impact.
5. To find out the important relationship between future contracts and options.

An Equity futures contract traded on an organized exchange. In this contract parties commit to buy or sell a specified amount of an individual equity or a basket of equities or an equity index at an agreed contract price on a specified date.

Equity futures are of two types :-

Index Future: This type of equity future has a index as its underlying. Like Dow Jones future. It settles in cash settlement only on a specified date.

Stock Future: This kind of future contract has a stock as its underlying and stock price defines the value of a future contract. generally settled in cash or stock.

While the pre-dominant form of trade in equities was in the form of Cash (or spot), on most exchanges today, futures are the preferred mode of trade in equity today.

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