NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Forwards and Futures
A stock trades at spot Rs 500 and pays no dividend. The risk-free rate is 12% per annum with continuous compounding. Using the cost-of-carry model, what is the approximate fair price of a 3-month futures contract? (Use e^0.03 = 1.03045)
The fair futures price is about Rs 515.23. Under cost of carry with continuous compounding, futures equals spot multiplied by e raised to rate times time, so 500 times e to the power 0.03 gives 515.23 for a three-month contract with no dividends.
- ARs 515.23Correct
- BRs 530.00
- CRs 500.00
- DRs 485.23
Explanation
F = S x e^(rT) = 500 x e^(0.12 x 0.25) = 500 x e^0.03 = 500 x 1.03045 = 515.23. Rs 530 wrongly uses a full year's interest, and Rs 485.23 subtracts the carry instead of adding it.
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