What is the theoretical futures price

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Reference no: EM131188096

Suppose there is a financial asset ABC, which is the underlying asset for a futures contract with settlement six months from now. You know the following about this financial asset and the futures contract:

In the cash market ABC is selling for $80.

ABC pays $8 per year in two semi-annual payments of $4, and the next semi-annual payment is due exactly six months from now.

The current six-month interest rate at which funds can be loaned or borrowed is 6%.

Respond to these questions:

a. What is the theoretical (or equilibrium) futures price?

b. What action would you take if the futures price is $83? What is the profit?

c. What action would you take if the futures price is $76? What is the profit?

Reference no: EM131188096

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