Problem:
One specialized type of security is called an equity futures. This is a contract that guarantees you a share of a particular company to be delivered to you not today, but sometime in the future, at a price that is determined by the market right now. This price is usually called the futures price of the stock (note - the term is plural - "futures"). If you 'buy' this futures, you don't pay for the shares now. You are actually signing a contract whereby you are committed to pay that price in a particular date in the future, and you are guaranteed to receive one share of the company at that time, irrespective of its actual market price at that future date. Suppose for example that the futures price of the XYZ company is $40. Suppose you 'buy' a 6-months futures contract. If six months later the share price is $45, you gain $5 per share. If the market price in 6 months is only $35, then you lose $5.
Using the Yahoo Finance take a look at the five year chart for your reference company (Dr. Pepper Snapple Group).
What do you think would the futures price of 100 shares of your reference company to be delivered to you in one year be right now?
Assignment Expectations:
The paper is to be two pages long. You DO NOT need to use complex mathematical formulas for this assignments. Instead, think about how much do you think the market value of 100 shares of your company will be in one year? In considering the possible answer please reflect also on the following:
Do you expect the price of the shares in one year to be much higher? Or lower? Or only a little bit higher?
How risky the stock is. Is its price prone to wild swings up and down? Or has the price been relatively stable the last few years?
What alternative investments you have access to. What rate does your bank give you on a savings account or certificate of deposit? The greater return you can get on other investments, the less you would be willing to pay for an equity future.