Question 12

i. The spot exchange rate is $1.25/1, the Euro interest rate is 3.5%, the US interest rate is 6% and the time left to expiry of the December 2021 dollar per euro futures contract is 200 days. Based on a 365-day trading year what is an appropriate price for the December 2021 dollar per euro future exchange rate? Comment on whether the dollar is at a futures premium or discount.

ii. The Dow Jones cash index is reading 30,600, the US risk free rate of interest is 6% and the dividend yield on the Dow Jones stocks is 2% per annum. Calculate an appropriate fair value for the December 2021 Dow Jones index futures contract assuming that the time left to expiration is 200 days based on a 365-trading year. Comment on whether the Dow Jones index futures contract is at a premium or discount to the cash market.