Throughout this question, assume that the one-year risk-free rate is 6%. In each of the parts, state any additional assumptions needed to solve the problem.
a) The FTSE Stock Index has current price of 5900 and annual dividend yield of 2%. Find the futures price of a 3-month contract on the index.
b) There is a temporary unexpected glut of wheat on world markets due to an unusually large harvest. Storage facilities are over-full and wheat users have excess inventories. Storage costs are $10 per ton per annum. The spot price of wheat is $600 per ton. What is the approximate futures price of wheat for delivery in 2 months’ time?
c) The current exchange rate is 130 Euros for 100 pounds sterling. The short-term interest rate in the Euro area is 4% per annum and in the UK 2% per annum. Consider a British
corporation which needs to secure 100 million Euros in 6 months’ time for a large capital expenditure. It will sign a forward contract with a bank to borrow the money for the
expenditure in six months’ time and pay the loan back in pounds sterling at the end of the year. Approximately what end-of year loan repayment should the bank demand (in pounds sterling) to agree now to fund the 100 million Euro expenditure in 6 months’ time?
