The risk-free rate is 5% and the dividend yield on the S&P 500 index is 2%.Which of the following is correct when a futures option on the index is being valued?
A) The futures price of the S&P 500 is treated like a stock paying a dividend yield of 5%.
B) The futures price of the S&P 500 is treated like a stock paying a dividend yield of 2%.
C) The futures price of the S&P 500 is treated like a stock paying a dividend yield of 3%.
D) The futures price of the S&P 500 is treated like a non-dividend-paying stock.

Question

Quizplus · Accepted Answer

When a futures option is being valued the dividend yield is set equal to the domestic risk-free rate.In this case the domestic risk-free rate is 5%.A is therefore correct.

The Risk-Free Rate Is 5% and the Dividend Yield on the S&P