The current level of S & P 500 index is 1100. The prospective dividend yield is 3%, and the current interest rate is 7%. 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) 1177
B) 1144
C) 1133
D) None of the above

Question

Quizplus · Accepted Answer

The formula to calculate the value of a one-year futures contract on the index is: 
Futures price = Current spot price * (1+ interest rate - dividend yield)^n
Where n is the time to maturity of the futures contract (in years)
Here, 
Current spot price = 1100
Dividend yield = 3%
Interest rate = 7%
n = 1 year
So, 
Futures price = 1100 * (1+7%-3%)^1
= 1144
Therefore, the value of a one-year futures contract on the index is 1144.

The Current Level of S & P 500 Index Is