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Find the price of the stock after one day

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Reference no: EM131637913

Question: Suppose the interest rate r is constant. Given S(0), find the price S(1) of the stock after one day such that the marking to market of futures with delivery in 3 months is zero on that day. This exercise shows an important benchmark for the profitability of a futures position: An investor who wants to take advantage of a predicted increase in the price of stock above the risk-free rate should enter into a long futures position. A short futures position will bring a profit should the stock price go down or increase below the risk-free rate.

Reference no: EM131637913

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