The Excel Application box (available at www.mhhe.com) shows how to use the spot-futures parity relationship to find a “term structure of futures prices,” that is, futures prices for various maturity dates.
a. Suppose that today is January 1, 2011. Assume the interest rate is 3% per year and a stock index currently at 1,500 pays a dividend yield of 1.5%. Find the futures price for contract maturity dates of February 14, 2011, May 21, 2011, and November 18, 2011.
b. What happens to the term structure of futures prices if the dividend yield is higher than the risk-free rate? For example, what if the dividend yield is 4%?