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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Forwards and Futures

A stock is at Rs 1,000 and the risk-free rate is 12% per annum with simple carry. A dividend of Rs 10 per share is expected in 1 month. What is the fair value of a 3-month futures contract, taking the dividend as received at the end of the first month and ignoring interest on the dividend?

The fair value is Rs 1,020. Carrying the stock for three months at 12% adds Rs 30, giving Rs 1,030, and the Rs 10 dividend the holder receives is deducted because it offsets the carrying cost, leaving Rs 1,020.

  1. ARs 1,020Correct
  2. BRs 1,030
  3. CRs 1,040
  4. DRs 1,010

Explanation

Cost of carry value = 1,000 x (1 + 0.12 x 0.25) = 1,030. Subtract the expected dividend of 10 as it reduces the holding cost: 1,030 - 10 = 1,020. Rs 1,030 ignores the dividend and Rs 1,040 adds it wrongly.

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