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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. The risk-free rate is 12% per annum (continuous compounding is ignored; use simple interest) and no dividends are expected. Using the cost of carry model with simple interest, what is the fair price of a 3-month futures contract?

The fair futures price is Rs 515. Under the cost of carry model with simple interest, spot Rs 500 is grown at 12% for a quarter of a year, which is a 3% carry, so 500 multiplied by 1.03 gives Rs 515.

  1. ARs 515Correct
  2. BRs 560
  3. CRs 485
  4. DRs 506

Explanation

Fair futures price = S x (1 + r x t) = 500 x (1 + 0.12 x 0.25) = 500 x 1.03 = Rs 515. Rs 560 uses a full year of interest. Rs 485 subtracts the carry instead of adding it. Rs 506 uses a 1% carry, which is wrong.

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