Consider a 1-year futures contract on an investment asset that provides no income. It costs $2 per unit to store the asset, with the payment being made at the beginning of the year. Assume that the spot price is $400 per unit and the risk-tree rate is 10% per annum for all maturities. 

a) What should be the price of the 1-year futures contract on this investment asset? 

b) If currently the bid and ask on this 1-year futures contract are $444.5 and $445 respectively, what will you do? Please be specific and describe what this would imply? 

c)If this asset provides a lump sum income distribution mid year that you forgot to estimate in  would you still be confident about your suggestion? Please explain?

Answer rating: 100% (QA)

To determine the price of the 1year futures contract on the investment asset we need to use the costofcarry model The costofcarry model states that th... View the full answer