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NISM Certifications · NISM-Series-XV: Research Analyst · Fundamental Analysis of Commodities

Spot gold is Rs 60,000 per 10 grams. Annual cost of carry (financing plus storage and insurance) is 6% per year, with no convenience yield. Using the simple cost-of-carry model, the fair price of a 6-month futures contract is closest to:

The fair futures price is Rs 61,800. Six months of carry at 6% a year is 3%, and adding this to the spot price of Rs 60,000 gives 60,000 x 1.03. Using the full year's carry would wrongly give Rs 63,600.

  1. ARs 61,800Correct
  2. BRs 63,600
  3. CRs 58,200
  4. DRs 60,000

Explanation

Carry for 6 months with simple proportion is 6% x 0.5 = 3%. Fair futures = 60,000 x 1.03 = Rs 61,800. Rs 63,600 applies the full-year 6% and ignores the 6-month tenor. Rs 58,200 subtracts the carry instead of adding it.

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