When dividend paying assets are involved,the spot-futures parity relationship can be stated as _________________. A) F₁ = S₀(1 + r_f) B) F₀ = S₀(1 + r_f - d)^T C) F₀ = S₀(1 + r_f + d)^T D) F₀ = S₀(1 + r_f)^T

Question

Quizplus · Accepted Answer

The spot-futures parity relationship for dividend paying assets is given by FS0 - SS0 = (P - D) * (1 + r)^T, where FS0 is the spot price of the asset, SS0 is the futures price of the asset, P is the present value of future dividends, D is the present value of future financing costs, r is the risk-free interest rate, and T is the time to expiration of the futures contract. Rearranging this equation, we get FS0 = SS0 * (1 + r)^T - (P - D). Substituting S₀ for SS0, (1 + r_f) for (1 + r)^T and d for (P-D), we get the equation in option B, which is the correct spot-futures parity relationship for dividend paying assets.

When Dividend Paying Assets Are Involved,the Spot-Futures Parity Relationship Can