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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 8% per annum with continuous compounding, and no dividends are expected. Using the cost of carry model, the fair price of a 3-month futures contract is closest to (take e^0.02 = 1.0202):

The fair futures price is about Rs 510.10. Under continuous compounding, futures price equals spot times e raised to rT, so 500 multiplied by e to the power 0.02 gives roughly 510.10. The futures trades at a premium to spot because the cost of carry is positive.

  1. ARs 510.10Correct
  2. BRs 520.00
  3. CRs 500.00
  4. DRs 490.10

Explanation

F = S x e^(rT) = 500 x e^(0.08 x 0.25) = 500 x e^0.02 = 500 x 1.0202 = Rs 510.10. Option 1 wrongly uses a full year's interest, option 3 ignores the cost of carry, and option 4 subtracts instead of adding it.

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