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How margin accounts protect investors against credit risk

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You want to invest $1 million in the S&P 500 index for one year. There are two ways to go about it. You could actually buy all the stocks in the index according to their index investment weights, or you could buy an S&P index futures contract (and put the $1 million in a risk-free investment for one year). The S&P index is now at 350, and an S&P index future with a one-year maturity is selling at 355. The riskless rate is 8%, and the dividend yield on the S&P index is 6%. Assume that the S&P contract size is equal to the index, and that all cash flows to the future occur at maturity (i.e., there is no daily resettlement).

Question1: Discuss whether the following statement is true or false: "The relationship between futures price and the expected future spot price of an underlying asset depends on the systematic risk of the underlying asset." Please support the answer mathematically.

Question2: In your own words, critically discuss how margin accounts protect investors against credit risk.

Reference no: EM132952917

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