If the continuously compounded risk free rate is 4% per year, and the continuous rate of dividend on a broad market index is 1% annually, what is the no-arbitrage 6-month futures price of the index if its spot value is $1000?

If the continuously compounded risk free rate is 4% per year, and the continuous rate of dividend on a broad market index is 1% annually, what is the no-arbitrage 6-month futures price of the index if its spot value is $1000?
A . $1015.11
B . $1015.00
C . $1030.45
D . $985.11

View Answer

Answer: A

Explanation:

The no-arbitrage futures price is given by exp(0.5*(4%-1%))*$1000 = $1015.11. Therefore Choice ‘a’ is the correct answer.