The relationship between the spot and futures prices of financial futures is given by A)[Futures price] = Spot price × (1 + r_f)^t (where r_f = risk-free rate). B)[Futures price] = Spot price × (1 + r_f − y)^t (where y = dividend yield or interest rate). C)[Futures price] = Spot price × (1 + r_m)^t (where r_m = market rate of return). D)[Futures price] = Spot price × (1 + r_m − r_f)^t.

Question

Quizplus · Accepted Answer

The equation [Futures price] = Spot price × (1 + r_f − y)^t takes into account both the risk-free rate (r_f) and the dividend yield or interest rate (y), which can have an impact on the relationship between spot and futures prices. This formula is commonly used in financial futures pricing. The other options either use irrelevant variables or are not commonly used in financial futures pricing.

The Relationship Between the Spot and Futures Prices of Financial