PRESENT VALUE AND CAPITAL BUDGETING

Present Value and Capital Budgeting

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Present Value and Capital Budgeting

Q1 Equity futures

The fair price of the coca cola equity index futures contract can be found according to the below mentioned formula

Where,

S - Equity index

t - Days to expiration

D - Value of dividends

rM - annualized risk-free rate

Assuming the investor buys 100 shares for a period of 360 days (1 year) which are traded at Dow Jones Industrial Average the future price of coca cola can be found as

F= 13,207.95 [ 1+ 1.80%/360]- 10.95%

F= $ 55.089

Whereas the current future price of coca cola is $79.24, it is therefore important that the buyer buys the stocks less than or equals to $ 55.089.

Stock Futures are forward transactions. They are a commitment to purchase at a future date that corresponds to the third Friday of March, June, September and December. The total outlay of the purchase price (buying futures) or the delivery of the shares (selling futures) only occurs if the position is brought to maturity. While Stock Futures are forward transactions, it is important to note that you can close the position at any time before maturity.

Prices of Stock Futures move parallel to the stock prices. This is a direct consequence of the relationship of maturity arbitrage ensures the convergence of futures prices with stocks. The forward price of a stock, future equals the current stock price plus interest on the price term is to be determined, less dividends paid if the action before the due date of the contract. This explains why, in general, the futures price exceeds the stock price, except in those periods in which no dividends to pay for the shares, typically in the months of January and June, as the dividend only charged the holder of the action.

While an investment in shares not credited or charged profits or losses as a result of increases or decreases in price in future are credited or charged daily gain or loss realized by the price changes. Also, should maintain and adjust the security until the position is closed, performing the opposite operation.

The profitability of the operation in Stock Futures will be determined by the income or loss on the initial outlay is made. When taking positions in shares the investor must pay the total investment so that the buyer pays the seller the amount. However, when purchasing stock futures there is no exchange of money between buyer and seller actually both buyer and seller are few guarantees. This percentage is calculated daily on the closing price of the future. Therefore, the initial outlay is lower in the future and being parallel movements in prices, the positive or negative return on investment will be higher in future positioning.

Futures may have various utilities in the financial market, including the most significant quote the following

Downward position in stocks

Coverage of shares

Forward cover

Take a position in two stocks

Switch from one action to another

The profitability of the operation in Stock Futures will be determined by the income or ...