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Can “dividends” be synonumous with “coupons”? Seems like T-bonds give coupons but the Q below uses the two interchangeably. Or is it a mistake?
Before Mason receives the e-mail, he turns his attention to a memo about a futures contract a subordinate is considering. Unfortunately, the memo arrives without the summary page to the notes. Mason must deduce the nature of the hedge based on its characteristics: The risk-free rate used in calculating the futures price, and that price adjusted to account for individual future dividends.
Based on the two characteristics of the futures contract in Mason’s memo, which of the following does the contract refer to?
Treasury bond futures? Stock index futures?
A) Yes Yes
B) No Yes
C) Yes No
Your answer: B was incorrect. The correct answer was C) Yes No
Both Treasury bond futures and stock index futures require the use of the risk-free rate to determine price. But while the pricing of bond futures requires the discounting of individual dividends, the pricing of stock-index futures does not, instead using a continuously compounded dividend yield. (Study Session 16, LOS 59.f) |
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