Suppose that the current level of the Standard and Poor's Index is 950. The prospective dividend yield on S&P 500 stocks is 3 percent, and the risk-free interest rate is 5 percent. What is the value of a one-year futures contract on the index? (Assume all dividend payments occur at the end of the year.)
A)969
B)998
C)979
D)1,026

Question

Quizplus · Accepted Answer

The correct answer is A. The value of a one-year futures contract on the index is 969. This is because the futures price is equal to the spot price plus the present value of the expected dividends. The spot price is 950, the prospective dividend yield is 3 percent, and the risk-free interest rate is 5 percent. Therefore, the present value of the expected dividends is 950 * 0.03 / (1 + 0.05) = 27.63. Adding this to the spot price gives a futures price of 950 + 27.63 = 969.

Suppose That the Current Level of the Standard and Poor's