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

A stock trades at Rs 500 in the spot market. The one-month futures contract on it is priced at Rs 506. Ignoring dividends, which statement is correct?

Futures at Rs 506 against spot Rs 500 trade at a Rs 6 premium. This reflects a positive cost of carry, a situation called contango. Backwardation would need futures below spot, and the two prices converge only at expiry, not earlier.

  1. AThe futures are at a discount of Rs 6, which is called backwardation
  2. BThe futures are at a premium of Rs 6, consistent with positive cost of carryCorrect
  3. CThe basis is positive Rs 6 computed as futures minus spot, and this signals an arbitrage-free price only if it is zero
  4. DThe futures price must equal the spot price before expiry

Explanation

Futures Rs 506 exceeds spot Rs 500, so futures trade at a premium of Rs 6, which reflects a positive cost of carry (contango). A discount would be backwardation. The futures price converges to spot only at expiry, not before, and basis need not be zero in advance.

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