8006 Exam Dumps | Suppose the S&P is trading at a level of 1000. Using continuously compounded rates, calculate the

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Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition
PRMIA.8006.v2021-04-25.q101
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Question 48/101

Suppose the S&P is trading at a level of 1000. Using continuously compounded rates, calculate the futures price for a contract expiring in three months, assuming expected dividends to be 2% and the interest rate for futures funding to be 5% (both rates expressed as continuously compounded rates)

A. $1,007.50

B. $1,000.00

C. $1,007.53

D. $1,012.58

Correct Answer: C

Explanation
The futures price of the contract will be the future value of the spot price, calculated at a net rate equal to the cost of funding the futures position, less any dividends or other distributions. Also note that when rates are continuously compounded, Future Value = Present Value x (exp(rate x time)).
Therefore in this case the futures price for the S&P = 1000 * exp((5%-2%)*3/12) = 1007.53

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