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determining current futures prices

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.

Using the Yahoo Finance take a look at the five year chart for Apple.INC. Using this chart and other information you can find on this company, answer the following question:

What do you think would the futures price of 100 shares of Apple, INC company to be delivered to you in one year be right now?

Solution Preview

Instead of writing up a report for Apple.INC, I decided it was better to give you an example and then you could write it up yourself following the guidelines below. I chose to use Wal-Mart for an example.

Forecast share price of Wal-Mart:

The trend in share price of Wal-Mart shows that, the price was quite stable over the period. Although growth in shares price was negative in 2006 and 2009 but over a period of time investors were getting a significant return on their investments. The market price of share is increasing with an average growth rate of 3.7225% over the last five years. This average growth rate can be used to forecast the future price of the stock of Wal-Mart. Based on this average growth rate and consideration of all the risks, it can be estimated that the share price will be $55.4395 for next year. It is forecasted on the basis of average growth in shares price over the years. This share price would increase the market value of 100 shares equal to $5543.95. The change in the share price of Wal-Mart from year 2005 to 2009 is shown in table below -

Year Share price Growth in share price
2005 $46.8
2006 $46.18 -1.32%
2007 $47.53 2.92%
2008 $56.06 ...

Solution Summary

Forecast share price of Wal-Mart is emphasized.

$2.19