CMA Final · Strategic Financial Management · Forwards and Futures
Shares of Kaveri Textiles trade at ₹800 in the spot market. The one-year risk-free rate is 8% per annum with annual compounding, and the stock pays no dividend. Under the cost-of-carry model, the fair one-year forward price is:
The fair forward price is ₹864. With no dividends, the forward equals spot compounded at the risk-free rate for one year: 800 x 1.08 = 864. Financing cost is added to spot, not subtracted, because holding the asset forgoes interest.
- A₹864Correct
- B₹736
- C₹808
- D₹800
Explanation
Forward price = Spot x (1 + r) = 800 x 1.08 = ₹864. Subtracting the carrying cost (₹736) reverses the sign of the financing cost. ₹808 treats 8% as a monthly-scaled or wrongly scaled figure and is incorrect.
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