NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Forwards and Futures
A stock trades at spot Rs 500. The risk-free rate is 8% per annum with continuous compounding, and no dividends are expected. Using the cost-of-carry model, the approximate fair price of a 3-month futures contract is (use e^0.02 = 1.0202)?
The fair futures price is spot multiplied by e raised to rT, which is 500 x e^0.02, about Rs 510.10. Futures trade above spot by the cost of carry when no dividends are expected, since interest is earned on funds locked up in holding the stock.
- ARs 510.10Correct
- BRs 520.00
- CRs 500.00
- 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. Rs 520 wrongly uses a full year of interest, and Rs 490.10 applies a wrong sign by discounting instead of compounding.
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