Futures Price calculation

 

Formula for Cost of Carry:

The cost of carry for a futures price can be represented as:

$$\text{Futures Price} = \text{Spot Price} + \text{Cost of Carry}$$

Where:

$$\text{Cost of Carry} = \text{Interest Cost} - \text{Dividend Yield} \text{ (for stock indices)}$$

Example:

Let's say you are looking at the Nifty index, which is currently trading at a spot price of 10,000. The interest rate is 6% per year, and the dividend yield of the index is 2% per year. We want to calculate the futures price for a contract expiring in three months.

1. Interest Cost Calculation:

   • Annual interest rate: 6%
   • For three months (1/4th of the year), the interest cost is:
   $$6\% \times \frac{1}{4} = 1.5\%$$

2. Dividend Yield Calculation:

   • Annual dividend yield: 2%
   • For three months, the dividend impact would be:
   $$2\% \times \frac{1}{4} = 0.5\%$$

3. Net Cost of Carry:

   • Net cost of carry for three months:
   $$\text{Net Cost of Carry} = 1.5\% - 0.5\% = 1\%$$

4. Calculating the Futures Price:

   $$\text{Futures Price} = 10,000 + (10,000 \times 1\%) = 10,100$$

Earnings Per Share (EPS)

The Earnings Per Share (EPS) formula is used to determine the profit attributable to each outstanding share of a company's stock.

EPS Formula:

$$\text{EPS} = \frac{\text{Net Income} - \text{Dividends on Preferred Stock}}{\text{Number of Outstanding Shares}}$$

• Net Income: The company's total profit after all expenses, taxes, and interest have been deducted.
• Dividends on Preferred Stock: This is subtracted because EPS represents the income available to common shareholders.
• Number of Outstanding Shares: The total number of shares that are currently owned by all shareholders.

 

Let’s assume a company has:

• Net Income: ₹1,000,000
• Dividends on Preferred Stock: ₹100,000
• Number of Outstanding Shares: 200,000 shares

Using the formula:

$$\text{EPS} = \frac{₹1,000,000 - ₹100,000}{200,000} = \frac{₹900,000}{200,000} = ₹4.5$$

Interpretation:

The EPS of ₹4.5 means that each share of the company earns ₹4.5 in net income.