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

A stock trades at Rs 400 in the spot market. Assuming a cost of carry of 9% per annum with continuous compounding is ignored and simple interest is used, what is the fair value of a 2-month futures contract (use 2/12 of a year, no dividends)?

The fair futures price is Rs 406. With simple interest, spot Rs 400 grows by 9% annually for two months, which is 1.5%, giving 400 times 1.015. The cost of carry is added to spot, not subtracted.

  1. ARs 406Correct
  2. BRs 436
  3. CRs 400
  4. DRs 394

Explanation

Fair value = 400 x (1 + 0.09 x 2/12) = 400 x 1.015 = Rs 406. Rs 436 wrongly uses the full year rate; Rs 394 subtracts the carry.

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