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CMA Final · Strategic Financial Management · Forwards and Futures

A Nifty-linked index is at 22,000. The dividend yield is 2% per annum and the risk-free rate is 7% per annum, both continuously compounded. Using the cost-of-carry model, the 3-month futures price is closest to which value? (e^0.0125 = 1.01258)

The 3-month futures price is about 22,277. The cost of carry is the risk-free rate less the dividend yield, 5% a year, so F = 22,000 × e^(0.05×0.25) = 22,000 × 1.01258. Ignoring dividends overstates the futures price.

  1. A22,277Correct
  2. B22,000
  3. C22,550
  4. D22,432

Explanation

Net carry = 7% − 2% = 5%. F = 22,000 × e^(0.05×0.25) = 22,000 × 1.01258 = 22,277. Option 22,550 ignores the dividend yield (uses 7%: about 22,388 is nearer, but the carry would be overstated). Option 22,432 adds the yield rather than subtracting it (9%: 22,000×e^0.0225≈22,500, so also wrong).

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