CMA Final · Strategic Financial Management · Forwards and Futures
Shares of Kaveri Textiles trade at ₹800 in the spot market. The continuously compounded risk-free rate is not used; instead, use simple annual compounding at 9% p.a. No dividend is expected. What is the fair price of a 3-month forward contract on one share, using the cost-of-carry model with (1+r)^(t)? Take 1.09^0.25 = 1.0221.
The fair forward price is ₹817.68. Under cost of carry with no dividends, the forward equals spot compounded at the risk-free rate for the contract period, so 800 multiplied by 1.0221 gives ₹817.68.
- A₹817.68Correct
- B₹800.00
- C₹836.00
- D₹818.00
Explanation
Fair forward price = Spot x (1+r)^t = 800 x 1.0221 = ₹817.68. Distractor ₹836 results from using a full year's compounding (800 x 1.09 = 872 is not it; 836 comes from 800 + 4.5%), and ₹818 is a rounded figure that does not follow the given factor exactly.
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