CMA Final · Strategic Financial Management · Forwards and Futures
The Nifty spot index is 22,000. The risk-free rate is 8% p.a. continuously compounded, and the index dividend yield is 2% p.a. continuously compounded. Using the cost-of-carry model, the theoretical 3-month futures price is closest to (e^0.015 = 1.01511)?
The theoretical futures price is about ₹22,332. Under cost of carry with continuous compounding, the futures price equals spot multiplied by e raised to (risk-free rate minus dividend yield) times time, here 6% for a quarter year.
- A₹22,332Correct
- B₹22,440
- C₹22,000
- D₹21,670
Explanation
F = S x e^((r - q)T) = 22,000 x e^(0.06 x 0.25) = 22,000 x 1.01511 = ₹22,332. Using r alone gives 22,000 x e^0.02 = about ₹22,444, which ignores the dividend yield.
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