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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Basics of Derivatives

A stock trades at Rs 1,000 in the cash market. The risk-free rate is 6% per annum (continuous compounding ignored; use simple cost of carry). A one-month future is priced fairly using cost of carry with no dividends. Using simple interest for 1 month (1/12 year), the fair futures price is closest to which value?

The fair futures price is about Rs 1,005. Under the cost-of-carry model with no dividends, futures equals spot plus one month's interest: 1,000 x (1 + 0.06 x 1/12) = 1,005. Using a full year's interest or subtracting carry gives wrong values.

  1. ARs 1,005Correct
  2. BRs 1,060
  3. CRs 995
  4. DRs 1,000

Explanation

Fair futures price = spot x (1 + r x t) = 1,000 x (1 + 0.06/12) = 1,000 x 1.005 = Rs 1,005. Rs 1,060 uses a full year of interest. Rs 995 subtracts the carry instead of adding it. Rs 1,000 ignores the cost of carry.

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