Forward Contract – Simple Numerical Problems

In exams, you get 2 types of problems: No Dividend and With Dividend.

Problem 1: Basic Forward Price (No Dividend)

Question:

• Spot Price of Reliance Share = ₹ 2,000.
• Risk-Free Interest Rate = 10% p.a.
• Calculate 3-month Forward Price.

Solution:

1. Formula: F = S × (1 + r × t) (Using Simple Interest for simplicity unless continuous is asked).
2. Time (t): 3 months = 3/12 = 0.25 years.
3. Calculation:
   • F = 2000 × (1 + 0.10 × 0.25)
   • F = 2000 × (1 + 0.025)
   • F = 2000 × 1.025
   • Answer: ₹ 2,050.

Problem 2: With Dividend Benefit

Question:

• Spot Price of ITC Share = ₹ 400.
• Interest Cost = 12% p.a.
• Expected Dividend = ₹ 10 (to be paid in 1 month).
• Calculate 6-month Forward Price.

Solution:

1. Logic: Forward Price = Spot + Interest Cost - Future Value of Dividend.
2. Interest Cost: 400 × 12% × (6/12) = ₹ 24.
3. Future Value of Dividend:
   • Dividend is received at month 1. We can invest it for remaining 5 months.
   • FV = 10 + (10 × 12% × 5/12) = 10 + 0.5 = ₹ 10.5.
4. Forward Price:
   • F = Spot + Interest - Dividend FV
   • F = 400 + 24 - 10.5
   • Answer: ₹ 413.5.

Exam Notes: Common Mistakes

1. Time Conversion: Always convert months to years (e.g., 6 months = 0.5). Do not use 6 directly in formula.
2. Dividend: Remember to subtract dividend. Receiving money reduces your cost.
3. Days: If days are given (e.g., 90 days), use 90/365.

Quiz Time! 🎯

Loading quiz…