A Futures Price Is Currently 40 Cents

question 16

Multiple Choice

A futures price is currently 40 cents.It is expected to move up to 44 cents or down to 34 cents in the next six months.The risk-free interest rate is 6%.What is the probability of an up movement in a risk-neutral world?

• A) 0.4
• B) 0.5
• C) 0.72
• D) 0.6

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Definitions:

Invested

To be invested refers to the allocation of resources, such as capital or time, into a particular venture, asset, or effort with the expectation of generating a future return.

Present Value Equation

A mathematical formula used to determine the current value of a future amount of money or stream of cash flows given a specific rate of return.

FV

Future Value, the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.

Compound Interest

Interest calculated on the initial principal of a deposit or loan, as well as on the accumulated interest from previous periods.