NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives
A stock trades at Rs 400 in the spot market. The risk-free rate is 6% per annum and no dividend is expected. Using the cost-of-carry model with simple interest, what is the theoretical price of a 3-month futures contract on this stock?
Under the cost-of-carry model, the futures price is spot compounded at the risk-free rate for the period. For Rs 400 at 6% for three months, carrying cost is Rs 6, so the theoretical futures price is Rs 406.
- ARs 406Correct
- BRs 412
- CRs 394
- DRs 424
Explanation
Futures price = spot x (1 + r x t) = 400 x (1 + 0.06 x 0.25) = 400 x 1.015 = Rs 406. Rs 412 uses 6 months, Rs 424 uses a full year, and Rs 394 subtracts the carry instead of adding it.
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