The Risk-Free Rate Is 5% and the Dividend Yield on the S&P

question 17

Multiple Choice

The risk-free rate is 5% and the dividend yield on the S&P 500 index is 2%.Which of the following is correct when a futures option on the index is being valued?

• A) The futures price of the S&P 500 is treated like a stock paying a dividend yield of 5%.
• B) The futures price of the S&P 500 is treated like a stock paying a dividend yield of 2%.
• C) The futures price of the S&P 500 is treated like a stock paying a dividend yield of 3%.
• D) The futures price of the S&P 500 is treated like a non-dividend-paying stock.

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Definitions:

Standard Deviation

A measure of the amount of variation or dispersion of a set of values, used in statistics to quantify the spread of data.

Investment Risk

The possibility of losing some or all of the invested capital, with the potential for variability in investment returns.

Strong Form

In the context of efficient market hypothesis, it states that all information, public and private, is completely reflected in stock prices.

Market Efficiency

A concept in financial economics that suggests that asset prices fully reflect all available information.