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

A stock trades at Rs 400 in the spot market. The risk-free rate is 6% per annum (simple, cost-of-carry model) and no dividends are expected. What is the theoretical fair price of a futures contract expiring in 3 months, approximately, using simple interest?

The theoretical futures price is Rs 406. Under the cost-of-carry model with simple interest, spot Rs 400 grows by 6% annually for a quarter, which is 1.5%, adding Rs 6 and giving Rs 406.

  1. ARs 406Correct
  2. BRs 424
  3. CRs 394
  4. DRs 412

Explanation

Fair price = S 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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