Question

A non-dividend-paying stock is currently priced at $33.15. The risk-free rate is 4.4 percent and a futures contract on the stock matures in three months. What price should the futures be

Answer 1

The price of the futures should be $33.52.

Step-by-step explanation:

The future price can be calculated using the formula for calculating the future value (FV) as follows:

FV = PV * (1 + r)^n ......................... (1)

Where;

FV = future value or future price = ?

PV = Present value or current price = $33.15

r = monthly risk-free rate = 4.4% / 12 = 0.044 / 12 = 0.00366666666666667

n = number of months = 3

Substituting the values into equation (1), we have:

FV = $33.15 * (1 + 0.00366666666666667)^3

FV = $33.15 * 1.01104038262963

FV = $33.5159886841722

Approximating to 2 decimal places, we have:

FV = $33.52

Therefore, the price of the futures should be $33.52.