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CMA Final · Strategic Financial Management · Forwards and Futures

A non-dividend-paying share of Kaveri Textiles trades at Rs 400 in the spot market. The continuously compounded risk-free rate is 8% per annum. Using the cost-of-carry model, what is the fair price of a 6-month forward contract? (Take e^0.04 = 1.0408.)

The fair forward price is Rs 416.32. Under cost of carry, a non-dividend share's forward price equals spot compounded at the risk-free rate for the contract period, so 400 times e raised to 0.08 times half a year gives 400 times 1.0408.

  1. ARs 416.32Correct
  2. BRs 432.00
  3. CRs 400.00
  4. DRs 384.00

Explanation

Forward price F = S x e^(rT) = 400 x e^(0.08 x 0.5) = 400 x 1.0408 = Rs 416.32. Rs 432 wrongly uses the full-year rate, giving 400 x 1.08. Rs 384 subtracts the carry cost instead of adding it.

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