NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives
Nifty spot is 22,000, the risk-free rate is 6% per annum (simple, annualised) and no dividends are expected. Using the cost-of-carry model with simple interest, what is the theoretical fair value of a one-month (1/12 year) Nifty futures contract?
The fair futures value is 22,110. Under cost of carry with no dividends, futures equal spot compounded at the risk-free rate for the period: 22,000 multiplied by 1.005, since 6% for one month is 0.5%.
- A22,110Correct
- B22,000
- C22,660
- D21,890
Explanation
Fair value = Spot x (1 + r x t) = 22,000 x (1 + 0.06/12) = 22,000 x 1.005 = 22,110. Using the full 6% gives 22,660, which ignores the one-month period. 21,890 subtracts the carry instead of adding it.
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