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CMA Final · Strategic Financial Management · Forwards and Futures

Nifty spot is 22,000. The risk-free rate is 8% p.a. and the index dividend yield is 2% p.a., both on a continuous basis. Using F = S x e^((r-q)t), what is the fair value of a 6-month Nifty futures contract? Take e^0.03 = 1.03045.

Fair futures value is 22,669.90. The cost of carry is the risk-free rate less the dividend yield, 6% a year, so for six months the exponent is 0.03 and 22,000 multiplied by 1.03045 gives 22,669.90.

  1. A22,000.00
  2. B22,669.90Correct
  3. C23,056.00
  4. D22,660.00

Explanation

Net carry = 8% - 2% = 6% p.a.; for 6 months the exponent is 0.03. F = 22,000 x 1.03045 = 22,669.90. Ignoring the dividend yield would use e^0.04, giving a higher value, which is wrong because dividends reduce the cost of carry.

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