The relationship between the spot and futures prices of financial futures is given by:
A) [Futures price] = Spot price(1 + rf)^t (where rf = risk-free rate)
B) [Futures price] = Spot price (1 + rf - y)^t (where y = dividend yield or interest rate)
C) [Futures price] = Spot price (1 + rm)^t (where rm = market rate of return)
D) None of the above

Question

Quizplus · Accepted Answer

The relationship between spot and futures prices of financial futures is given by the cost of carry model, which is represented by [Futures price] = Spot price (1 + rf - y)^t, where rf is the risk-free rate and y is the dividend yield or interest rate. This model assumes that the cost of carrying the underlying asset (such as stock or bond) is represented by the difference between the risk-free rate (rf) and the income generated by the asset (dividend yield or interest rate, represented by y).

The Relationship Between the Spot and Futures Prices of Financial