Create risk-free portfolio using only the futures contract

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Reference no: EM131585395

Assume that the S&P 500 Composite Index pays two dividends: one at the end of six months, another at the end of the year. Both dividends are for $23. The current value of the index is at 2,434 and the risk-free rate is 1% per year, compounded annually (not continuously). (a) Calculate the price of a one-year futures contract on the Index. (b) Create a risk-free portfolio using only the futures contract and the index itself. What is the exact dollar value of the return you would receive on this portfolio? Show that your portfolio is risk-free by using a payoff table with a range of stock index values going from 2,300 to 2,500 in increments of 50.

Reference no: EM131585395

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