NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Forwards and Futures
A share trades at Rs 400 and its 2-month futures is quoted at Rs 412. The cost of carry is 12% per annum simple, with no dividends. An arbitrageur ignoring transaction costs buys the share and sells the futures, holding to expiry. What is the risk-free profit per share?
The profit is Rs 4 per share. The fair futures price is Rs 408, being Rs 400 plus Rs 8 of two-month carry. Selling the overpriced futures at Rs 412 against buying spot captures the Rs 4 difference at expiry.
- ARs 12
- BRs 4Correct
- CRs 8
- DRs 0
Explanation
Fair price = 400 + 400 x 12% x 2/12 = 400 + 8 = Rs 408. Futures trade at 412, so they are overpriced by Rs 4, which is locked in by cash-and-carry. Rs 12 ignores the carry cost; Rs 8 is only the carry itself.
Did you get it right without looking?
One question tells you little. A timed set on Introduction to Forwards and Futures shows your real accuracy, how long you take and where you lose marks.
More Introduction to Forwards and Futures questions
- A trader buys 2 lots of Nifty futures (lot size 50) at 22,000. The day's settlement price is 22,060. The next day's settlement price is 21,9…
- Nifty futures with a fair value of 22,000 trade in the market at 22,150. Ignoring transaction costs, which action would capture an arbitrage…
- A stock futures contract has spot Rs 1,000, cost of carry financing 9% p.a. simple, and a dividend of Rs 10 expected within the 4-month life…
- When the futures price is lower than the spot price of an index, the market situation is described as:
- A trader buys 2 lots of Nifty futures, each lot of 75 units, at 24,000. The day's settlement price is 24,060. On the next day the trader squ…
- An investor holds a portfolio and wants to protect it against a market fall in the short term without selling the shares. Which futures acti…