Throughout this question, assume that the one-year risk-free rate is 6%. In each of the parts, state any

additional assumptions needed to solve the problem.

a) The FTSE Stock Index has current price of 5900 and annual dividend yield of 2%. Find the

futures price of a 3-month contract on the index. (3 points)

b) There is a temporary unexpected glut of wheat on world markets due to an unusually large

harvest. Storage facilities are over-full and wheat users have excess inventories. Storage costs

are $10 per ton per annum. The spot price of wheat is $600 per ton. What is the approximate

futures price of wheat for delivery in 2 months' time? (3 points)

c) The current exchange rate is 130 Euros for 100 pounds sterling. The short-term interest rate

in the Euro area is 4% per annum and in the UK 2% per annum. Consider a British

corporation which needs to secure 100 million Euros in 6 months' time for a large capital

expenditure. It will sign a forward contract with a bank to borrow the money for the

expenditure in six months' time and pay the loan back in pounds sterling at the end of the

year. Approximately what end-of year loan repayment should the bank demand (in pounds

sterling) to agree now to fund the 100 million Euro expenditure in 6 months' time?