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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Forwards and Futures

A stock trades at Rs 500 in the spot market. The risk-free rate is 12% per annum (simple, for cost of carry), and no dividends are expected. Using the cost of carry model, what is the fair price of a 3-month futures contract?

The fair price is Rs 515, because the spot price of Rs 500 is grown by the cost of carry of 12% for a quarter of a year, which is 3%. That gives 500 multiplied by 1.03, equal to Rs 515.

  1. ARs 515Correct
  2. BRs 560
  3. CRs 506
  4. DRs 485

Explanation

Fair futures price = S x (1 + r x t) = 500 x (1 + 0.12 x 0.25) = 500 x 1.03 = Rs 515. Rs 560 uses a full year of carry. Rs 485 subtracts the carry instead of adding it. Rs 506 uses only one month of carry.

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