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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Forwards and Futures

The spot price of a stock is Rs 500 and the cost-of-carry model is applied with continuous compounding at 12% per annum, with no dividends. Using e^0.03 = 1.03045, what is the fair value of a 3-month futures contract (approximately)?

Fair futures price equals spot times e raised to rate times time. With 500, 12% and 0.25 years, that is 500 × e^0.03, about Rs 515.23. The cost of carrying the stock for three months is added to the spot price.

  1. ARs 515.23Correct
  2. BRs 530.00
  3. CRs 500.00
  4. DRs 485.30

Explanation

F = S × e^(rT) = 500 × e^(0.12×0.25) = 500 × e^0.03 = 500 × 1.03045 = 515.23. Rs 530 wrongly uses a full year's rate on 3 months... actually 12% simple for a year; Rs 485.30 wrongly discounts.

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