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

Question

Quizplus · Accepted Answer

The relationship between spot and futures prices in financial futures is determined by the cost of carry function, which includes the risk-free rate, dividend yield or financing rate, and time to expiration. Therefore, the correct formula is B) [Futures price] = Spot price x (1 + r_f - y)^t, where y is the dividend yield or financing rate.

The Relationship Between the Spot and Futures Prices of Financial