Question

The one-year futures price on a particular stock-index portfolio is 2,545, the stock index currently is 2,500, the one-year risk-free interest rate is 3.0%, and the year-end dividend that will be paid on a $2,500 investment in the index portfolio is $24. Required: By how μch is the contract mispriced? (Input the amount as a positive value.)

a) $25
b) $50
c) $75
d) $100

Answer 1

The mispricing of the futures contract can be calculated as $45, meaning the contract is mispriced by $45.

Step-by-step explanation:

To calculate the mispricing of the futures contract, we need to compare the current price of the stock index to the futures price. The dividends are irrelevant to this calculation. From the given information, the mispricing can be calculated as:

Mispricing = Futures Price - Spot Price = $2,545 - $2,500 = $45

Therefore, the contract is mispriced by $45, which corresponds to option b).