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CMA Final · Strategic Financial Management · Forwards and Futures

Spot price of Nifty is 22,000. The index yields a dividend of 2% per annum (continuous) and the risk-free rate is 8% per annum (continuous). What is the fair 3-month futures price? (Use e^0.015 = 1.015113)

The fair futures price is about 22,333. For an index with a continuous dividend yield, the futures price is the spot compounded at the risk-free rate minus the yield, which is 6% for three months. That gives 22,000 times e to the power 0.015.

  1. A22,333.25Correct
  2. B22,000.00
  3. C22,660.00
  4. D22,440.00

Explanation

Net carry = 8% - 2% = 6%. F = 22,000 x e^(0.06 x 0.25) = 22,000 x 1.015113 = 22,332.49, approx 22,333. Using 8% alone gives 22,440 approx, which ignores dividend yield. Adding the yield gives a higher figure, which is wrong.

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