If in Cash market price of share of ABC ltd is $1000, risk free rate is...

If in Cash market price of share of ABC ltd is $1000, risk free rate is 10% pa and maturity period of futures is 3 months what would be the fair price of the futures of ABC ltd taking the value of e as 2.71?

Select one:
a. $1002.30
b. $ 1010.50
c. $1006.25
d. $1009.80

Expert Solution

Answer-

Given

market price = $ 1000
interest rate r = 10 % / annum = 10 % / 4 = 2.5 % = 0.025 / quarter [ 3 months ]
Time of maturity = t = 3 months = 3 /12 = 0.25 years

Fair price of the futures of ABC ltd = cash market price x e^{r x t}

Fair price of the futures of ABC ltd = $ 1000 x 2.71⁽^{0.025 x .25 )}

= $ 1000 x 2.71^0.00625

= $ 1000 x 1.00625

= $ 1006.25

Therefore fair price of the futures of ABC ltd = $ 1006.25

The correct Option is c. $ 1006.25

jeff jeffy answered 2 years ago

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