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CMA Final · Strategic Financial Management · Forwards and Futures

Shares of Kaveri Motors trade at ₹800 in the spot market. No dividend is expected during the next 3 months. The continuously compounded risk-free rate is not used; the simple annual rate of interest is 8%. Using the cost-of-carry model with simple interest, what is the fair 3-month futures price?

The fair futures price is ₹816. Under the cost-of-carry model with no dividend, the futures price equals spot plus financing cost: 800 × (1 + 8% × 3/12) = 800 × 1.02 = ₹816.

  1. A₹816Correct
  2. B₹800
  3. C₹832
  4. D₹784

Explanation

Fair futures price = Spot × (1 + r × t) = 800 × (1 + 0.08 × 3/12) = 800 × 1.02 = ₹816. Option ₹784 subtracts the carrying cost instead of adding it. Option ₹832 applies a 4% charge, which would correspond to 6 months rather than 3 months.

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