CMA Final · Strategic Financial Management · Forwards and Futures
Shares of Kaveri Textiles trade at ₹800 and pay no dividend. The continuously compounded risk-free rate is 8% per annum. Using the cost-of-carry model with continuous compounding, the theoretical price of a 6-month forward contract is closest to (e^0.04 = 1.0408):
The forward price is ₹832.64. With no dividend, the cost-of-carry model compounds the spot price at the risk-free rate for the contract period: 800 times e to the power 0.04, giving 832.64. The full-year figure of 864 ignores that the tenor is only six months.
- A₹832.64Correct
- B₹864.00
- C₹800.00
- D₹768.00
Explanation
F = S x e^(rT) = 800 x e^(0.08 x 0.5) = 800 x 1.0408 = ₹832.64. Option ₹864 uses 8% for a full year, wrongly ignoring the 6-month tenor. Option ₹768 subtracts carry instead of adding it.
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