Suppose the value of the S&P 500 Stock Index is currently $1,650. If the one-yea

Question

Suppose the value of the S&P 500 Stock Index is currently $1,650. If the one-year T-bill rate is 3.3% and the expected dividend yield on the S&P 500 is 2.6%.

What should the one-year maturity futures price be?

What would the one-year maturity futures price be, if the T-bill rate is less than the dividend yield, for example, 1.6%?

What should the one-year maturity futures price be?

What would the one-year maturity futures price be, if the T-bill rate is less than the dividend yield, for example, 1.6%?

Explanation / Answer

Answer: Price (1 + Rf – Rp) = MP

=1650 (1 + .033 - .026) = $1661.55

Answer: B) 1650 (1 + .016 - .026) = $1633.5

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