The multiplier for a futures contract on a stock market index is $250. The maturity of the contract is 1 year, the current level of the index is 1,360, and the risk-free interest rate is 0.6% per month. The dividend yield on the index is 0.3% per month. S

a. The cash flow from the mark-to-market proceeds on the contract can be calculated by finding the change in the value of the futures contract after one month, and multiplying it by the multiplier of $250. The initial value of the futures contract is 1,360 x $250 = $340,000. After one month, the futures contract value is calculated by adding the interest earned on the initial margin and subtracting the dividends paid on the index during the month. Interest earned on the initial margin = $13,600 x 0.6% = $81.60 Dividends paid on the index = 1,360 x 0.3% = $4.08 The new value of the futures contract is therefore: $340,000 + $81.60 - $4.08 = $340,077.52 The change in the value of the futures contract is: $340,077.52 - $340,000 = $77.52 The cash flow from the mark-to-market proceeds on the contract is therefore: $77.52 x $250 = $19,380 (rounded to the nearest dollar) b. The holding-period return is the total return earned on the investment over the holding period, expressed as a percentage of the initial margin. The initial margin on the contract is $13,600. The final value of the futures contract after one month is $340,077.52. Therefore, the holding-period return can be calculated as: (Holding period return = (Final value - Initial margin) / Initial margin) x 100% = (($340,077.52 - $13,600) / $13,600) x 100% = 2,400.55% The holding-period return is extremely high due to the leverage provided by the futures contract. However, it is important to note that futures trading involves significant risk and is not suitable for all investors.