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One specialized type of security is called an equity futures. This is
a contract that guarantees you a share of a particular company to be
delivered to you not today, but sometime in the future, at a price that
is determined by the market right now. This price is usually called the
futures price of the stock (note – the term is plural – “futures”). If
you ‘buy’ this futures, you don’t pay for the shares now. You are
actually signing a contract whereby you are committed to pay that price
in a particular date in the future, and you are guaranteed to receive
one share of the company at that time, irrespective of its actual market
price at that future date. Suppose for example that the futures price
of the XYZ company is $40. Suppose you ‘buy’ a 6-months futures
contract. If six months later the share price is $45, you gain $5 per
share. If the market price in 6 months is only $35, then you lose $5.
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Using the Yahoo Finance
take a look at the five year chart for your reference company (the one
you chose for SLP1). Using this chart and other information you can find
on this company, write a paper answering the following question:
What do you think would the futures price of 100 shares of
your reference company to be delivered to you in one year be right now?
The paper is to be two pages long.
You DO NOT need to use complex mathematical formulas for this
assignment. Instead, think about how much do you think the market value
of 100 shares of your company will be in one year? In considering the
possible answer please reflect also on the following:
Do you expect the price of the shares in one year to be much higher? Or lower? Or only a little bit higher?
How risky the stock is. Is its price prone to wild swings up and
down? Or has the price been relatively stable the last few years?
What alternative investments you have access to. What rate does your
bank give you on a savings account or certificate of deposit? The
greater return you can get on other investments, the less you would be
willing to pay for an equity future.