Suppose that the current level of the S&P 500 Index is 1,100. The prospective dividend yield is 3 percent, and the current risk-free interest rate is 7 percent. What is the value of a one-year futures contract on the index? (Assume all dividends are paid at the end of the year.)
A)1,056
B)1,144
C)1,210
D)995

Question

Quizplus · Accepted Answer

To calculate the value of a one-year futures contract on the index, we need to use the formula:

F = S(1 + r - D)

Where: 
F = Futures price 
S = Current index level 
r = Risk-free interest rate 
D = Dividend yield

Substituting the given values, we have:

F = 1,100(1 + 0.07 - 0.03) 
F = 1,144

Therefore, the value of a one-year futures contract on the index is 1,144. Option B is the correct answer.

Suppose That the Current Level of the S&P 500 Index