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CMA Final · Strategic Financial Management · Forwards and Futures

Shares of Kaveri Textiles are quoted at Rs 400 in the spot market. The risk-free rate is 9% per annum with continuous compounding, and the company pays no dividend. Using the cost-of-carry model, what is the fair price of a 4-month futures contract? (Use e^0.03 = 1.03045)

The fair futures price is Rs 412.18. Under cost of carry with no dividend, the spot price of Rs 400 is compounded continuously at 9% for four months, giving 400 times e to the power 0.03, which is about 1.03045 times the spot price.

  1. ARs 412.18Correct
  2. BRs 436.00
  3. CRs 400.00
  4. DRs 388.18

Explanation

F = S x e^(rT) = 400 x e^(0.09 x 4/12) = 400 x e^0.03 = 400 x 1.03045 = Rs 412.18. Rs 436 wrongly adds a full year of interest at 9%. Rs 388.18 wrongly discounts instead of compounding forward.

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