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

Spot price of a non-perishable commodity is Rs 60,000 per unit. The cost of carry (storage, insurance and financing) is 6% per annum, 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 six-month futures price is Rs 61,800. Carry cost of 6% per annum becomes 3% for half a year, and adding 3% to the Rs 60,000 spot price gives Rs 61,800. Using the full annual rate would wrongly give Rs 63,600.

  1. ARs 61,800Correct
  2. BRs 63,600
  3. CRs 56,400
  4. DRs 58,200

Explanation

Carry for 6 months = 6% x 0.5 = 3%. Fair futures price = 60,000 x 1.03 = Rs 61,800. Rs 63,600 uses the full annual rate and ignores the time period. Rs 58,200 subtracts the carry instead of adding it.

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