1. At time = 0, a speculator takes a long position in a futures contract on stock i that will expire at time . Rearranging McDonald equation (6.5), the present value of this contract to the speculator is given by:

   + [ ]00

   Where is the risk-free rate, and the discount rate for the expected price of stock i at time T, [ ], is given by = = + ([ ] ), which is the CAPM required rate of return on the stock. Assume no-arbitrage pricing. Show analytically that if the return from stock i is positively correlated with the overall return on the stock market, the market risk premium is positive, and stock i is risky, then the futures market must be in backwardation. (2 points)