Skip to content

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

A stock trades at spot Rs 500. The one-month futures is priced using the cost of carry model with a continuous compounding-free simple approach: risk-free rate 12% per annum, no dividends, time to expiry 1 month (use 1/12 year, simple interest). What is the fair futures price?

The fair futures price is Rs 505. Under simple cost of carry, spot Rs 500 is grown at 12% annually for one month, which is 1%, adding Rs 5 of financing cost with no dividends to deduct.

  1. ARs 495
  2. BRs 505Correct
  3. CRs 506
  4. DRs 560

Explanation

Fair price = Spot x (1 + r x t) = 500 x (1 + 0.12/12) = 500 x 1.01 = Rs 505. Rs 495 wrongly subtracts the carry cost, Rs 506 uses an incorrect rate of 1.2%, and Rs 560 applies the full annual rate.

Did you get it right without looking?

One question tells you little. A timed set on Introduction to Forwards and Futures shows your real accuracy, how long you take and where you lose marks.

Practise Introduction to Forwards and FuturesFree diagnostic mock

More Introduction to Forwards and Futures questions