FIN310 SLP – Equity Futures / Single-Stock Futures

Assignment Instructions

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 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 assignments. 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.

What are Single-Stock Futures (SSFs), or Equity Futures?

Single-Stock Futures (SSFs), or equity futures, are futures contracts between given parties or legal entities to exchange particular stocks in specific companies for the strike, or futures, price but with the deliveries happening at particular delivery, or future, dates. Such contracts’ trading happens on platforms known as futures exchanges. The contracts’ buyers are deemed as being “long” since they expect increases in the prices of the stocks while the sellers are taken as being “short” since they expect the prices to decline. Typically, SSFs are traded in batches, lots, or increments, of 100 units. Notably, share dividends or rights are not transmitted when the units are purchased. This essay explores various facets of SSFs, particularly Toyota Motor Corporation’s SSFs.

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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 price of the 100 Toyota SSFs after a year can be estimated from the data supplied by Yahoo Finance (2016). On December 1, 2015, the opening price for 100 Toyota shares was $1257.50. The price dropped to $1215.20, which was the opening price for 100 Toyota shares on January 1, 2016. The price dropped to $1200.00, which was the opening price for 100 Toyota shares on February 1, 2016. Further, the price dropped to $1053.00, which was the opening price for 100 Toyota shares on March 1, 2016 (Yahoo Finance, 2016). Between December 1, 2015 and January 1, 2016, the price shed off $42.30. Between January 1, 2016 and February 1, 2016, the price shed off $15.20. Between February 1, 2016 and March 1, 2016, the price shed off $47.20. That means that the price was on a decline between December 1, 2015 and March 1, 2016. The price declined by $34.90 per month. If the trend is sustained, the price will have declined by $418.8 in 12 months. That means that the opening price for 100 Toyota shares on March 1, 2017 will be around $634.20 compared to the opening price of $1053.00 March 1, 2016 according to Yahoo Finance (2016). The 100 Toyota shares’ futures price that will be delivered in 12 months would be $634.20 right now.

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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?

The Toyota stock is rather risky going by the trend it has experienced between December 1, 2015 and March 1, 2016 (Yahoo Finance, 2016). Even though its price has not been typified by wild changes in the months, it has been on steady decline. The stock may be deemed as been colored by the threat, or risk, of considerable declines presently. The declines may persuade investors previously keen on investing in Toyota SSFs to seek alternative, or other, investments. The investments include CDs (Certificates of Deposits) and HYSAs (High-Yield Savings Accounts).

What alternative investments you have access to. What rate does your bank give you on a savings account or certificate of deposit?

Typically, the rate offerings being offered by banks for CDs whose terms are less than two years are at most 0.50% APY. Only those HYSAs whose terms are more than four years are at least 1.00%. The majority of HYSAs are comparatively incapable of maintaining such yields. The best rates offered by banks are at most 0.05%. Consequently, clients are likely to turn to internet-based banks for better savings rates. Regarding risk, HYSAs are not guaranteed to post similar rates always. Banks may elect to adjust the rates in line with their operating environments. CDs offer investors opportunities for locking-in rates for the lengths of their terms, which are rather welcome where the rates are declining persistently. By and large, an investor would be less and less likely to invest in SSFs with the continued growth in the returns they get from alternative investments.

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