Homework practice

Chicago Board of Trade has just introduced a new single stock futures contract on the stock of Mango, company currently paying no dividends.Each contract calls for delivery of 1000 shares of stock in one year.The T-bill rate is 6% per year.

i. If Mango stock now sells at $120 per share, what should the futures price be? $127.20

ii. If the Mango stock price drops by 3%, what will be the change in the futures price and the change in the investor's margin account? $116.40

iii. If the margin on the contract is $12,000, what is the percentage return on the investor's position? -31.8%

Suppose a Russell index portfolio pays a dividend yield of 3% annually.The index value currently is 900.The T-bill rate is 5% and the Russell futures price for delivery in one year is $ 912.Construct an arbitrage strategy to exploit the mispricing and show that your profits one year hence will equal the mispricing in the futures market.