Pricing Stock Futures
A futures contract on a stock gives its owner the right and obligation buy or sell the stocks. Like index futures stock futures are also cash settled; there is no delivery the underlying stocks. Just as in the case of index futures the main difference between can more and stock futures are that: (i) There are no costs of storage involved in holding stock, (ii) Stocks come with a dividend stream, which is a negative cost if you are long, the stock and positive cost if you are short the stock. Therefore, cost of carry = financing cost dividends a crucial aspect of dealing with stock futures, as opposed to commodity futures is an forecasting of dividends. The better the forecast of dividend off by a security, the better is estimate of the futures price. The pricing of stock futures is discussed below when (i) no dividend is expected, (ii) when dividend is expected.
Pricing Stock Futures When No Dividend Expected
The pricing of stock futures is also based on the cost of carry model, where the carrying cost is the cost of financing the purchase of the stock, minus.the present value of dividends obtained from the stock. If no dividends are expected during the life of the contract pricing futures on that stock is very simple. It simply involves multiplying the spot price by the cost of carry.