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The current futures price of a stock is $15 per share. One month later, when the...

The current futures price of a stock is $15 per share. One month later, when the futures option expires, the futures price could have risen to $16.5 per share or declined to $14 per share. The strike price is $14.5. The risk-free rate is 6%.

What is the cost of futures contract at time zero? (1 mark)

Solutions

Expert Solution

Given: Spot Price (S) = $15/sahre

Strike Price (K) = $14.5/share ; Risk free rate = 6% ; Future Price: fu=$16.5/sahre or fd=$14/sahre

Using the Simple Binomial Model to find the price of the Future option contract. This method is based on the concept of creating a risk-free portfolio by having long on stock and short on the option contract. It goes like this:

So the Price of the Future option contract comes out to be $2.056(approx)/share.

jeff jeffy answered 1 year ago
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