You are trying to value a 3-month futures contract on a stock. The market rate of return is 11.2 percent, the risk-free rate is 3.8 percent, and the dividend yield on the stock is 2.6%. The stock is currently selling for $33 a share. What is the value of "T" as used in the formula for computing the future stock price (FT = S(1 − r)^T)?
A).112
B).250
C).026
D).038
E).064

Question

Quizplus · Accepted Answer

The value of "T" is the time to maturity of the futures contract, which is 3 months. The formula for computing the future stock price is:FT = S(1 − r)^Twhere:FT is the future stock priceS is the current stock pricer is the risk-free rateT is the time to maturityIn this case, the current stock price is $33, the risk-free rate is 3.8%, and the time to maturity is 3 months. Therefore, the value of "T" is:T = 3 / 12 = 0.25Therefore, the correct answer is B).

You Are Trying to Value a 3-Month Futures Contract on a Stock