NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives
Which statement best describes the cost of carry model for pricing stock futures on a non-dividend-paying stock?
Under the cost of carry model, the futures price of a non-dividend stock equals the spot price plus the cost of financing the holding until expiry. It is an arbitrage-based value rather than a forecast, and is normally above spot when interest rates are positive.
- AFutures price equals spot price plus the cost of financing the position until expiryCorrect
- BFutures price equals the expected future spot price
- CFutures price is always below the spot price
- DFutures price equals spot price minus the risk-free interest
Explanation
Under cost of carry, futures price = spot x (1 + r)^t, or spot plus financing cost for a stock with no dividends. It is based on arbitrage, not forecasts of the spot price, and is normally above spot when rates are positive.
Did you get it right without looking?
One question tells you little. A timed set on Understanding Derivatives shows your real accuracy, how long you take and where you lose marks.
More Understanding Derivatives questions
- A stock trades at Rs 400 in the spot market. The risk-free rate is 6% per annum and no dividend is expected. Using the cost-of-carry model w…
- Which statement best describes the role of the clearing corporation in exchange-traded futures in India?
- Mr. Rohan Mehta holds 1,000 shares of an Indian company bought at Rs 500 each. The shares now trade at Rs 600. He fears a short-term fall bu…
- An investor buys a call option on a stock with strike Rs 300 for a premium of Rs 15. Which statement about the position at expiry is correct…
- In an exchange-traded equity futures contract, which of the following is the main purpose of the daily mark-to-market (MTM) process?
- Ms. Meera Iyer holds a diversified portfolio of Nifty 50 stocks worth Rs 50 lakh with a beta of 1.0 against the Nifty. She fears a short-ter…