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

A stock trades at Rs 400 and the risk-free rate is 9% per annum with continuous compounding. Using the cost-of-carry model, ignoring dividends, what is the approximate fair price of a 3-month futures contract? (Use e^0.0225 = 1.02275)

The fair futures price is about Rs 409.10. Under the cost-of-carry model with continuous compounding, futures price equals spot times e raised to rate times time, so 400 multiplied by e^0.0225, which is 1.02275, gives Rs 409.10.

  1. ARs 409.10Correct
  2. BRs 400.00
  3. CRs 409.00
  4. DRs 436.00

Explanation

F = S x e^(rT) = 400 x e^(0.09 x 0.25) = 400 x 1.02275 = Rs 409.10. Rs 409.00 uses simple interest (400 x 0.0225 = 9 added). Rs 436 uses the full annual rate without time adjustment. Rs 400 ignores the cost of carry.

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