Problem No.

1: Stock Futures
Stock of Arvind Mills Ltd. (AML) is quoted at Rs. 300/- in the spot market. Risk-free interest
rate is 8% p.a. (continuously compounded) for all maturities. If AML is declaring dividend of
Rs.0.75 per share in every quarter, what is the value of futures contract having a tenor of 10
months in respect of AMLs stock?
F0 = (S0 I) e r T
e x = an Exponential function; constant e is equivalent to 2.71828, the base of natural
logarithm
To discount e Rn by continuously compounding rate (R) for n years - multiply by e -Rn
Present value of dividends i.e., Income =
I = [0.75e-0.08*3/12] + [0.75e-0.08*6/12] + [0.75e-0.08*9/12] = 2.162
Forward Rate of AML = F0 = (300 2.162) e0.08*10/12 = 318.37

Problem No. 2: Commodity Futures

The spot price of silver is Rs. 900 per ounce. The storage costs are Rs.24 per ounce per year,
payable quarterly in advance. Assuming that interest rates are 10% p.a. for all maturities,
calculate the futures price of silver for delivery in 9 months.

Problem No.3: Index Futures

On July 1, 2016, an investor holds 50,000 shares of Coal India Ltd. The market price of the
CILs stock is Rs.300/-. The investor is interested in hedging against movements in the
market over the next month and decides to use the September NSE Futures contract. The
index is currently at 8,000 level and one contract is for delivery of 200 times the index. The
beta of the stock is 1.3. What strategy should the investor follow?

Problem No.4: FRA

Bank of Nova Scotia sold a USD 6/12 forward rate agreement (FRA) to Orpat Ltd. at a
contract rate of 5.50%. The reference rate is 6-month LIBOR. Calculate the cash flows on
USD 500,000 if LIBOR is quoted in the following way.
a) LIBOR 6.00%
b) LIBOR 5.50%
c) LIBOR 4.75%

Problem No. 5: FRA

Bank of America and Exide Industries Ltd. entered into 3 x 6 month forward rate agreement
(FRA). Exide Industries pays FRA rate at 9% p.a. Bank of America pays NSE MIBOR 3
months benchmark rate. Other details of the deal are given below.
Notional principal: Rs. 5 crore
FRA Trade Date

: January 3, 2016

FRA Settlement Date : April 3, 2016

FRA Maturity Date : July 3, 2016
FRA Fixing Date : April 2, 2016

Assume that NSE MIBOR 3 months benchmark rate is quoted at 9.50% p.a. on April 2, 2016,
calculate the cash flows?

Problem No. 6: Futures

The risk-free interest rate is 7% p.a. with continuous compounding, and the dividend yield on
a stock index is 3.2% p.a. The current value of the index is 150. What is the 6-month futures
price?

Problem No. 7: Futures

The risk-free interest rate is 10% p.a. with continuous compounding, and the dividend yield
on a stock index is 4% p.a. The current value of the index is 400 and the futures price for a
contract deliverable in four months is 410. What is the arbitrage opportunity available here?
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