
34 Derivatives and Risk Management
Balance on December 31, 2011 = Balance in the account on December 31, 2010 + Interest in 2011
= 50,000 × 1.12 × 1.12 + 50,000
× 1.12 × 1.12 × 0.12
= 50,000 × 1.12 × 1.12 × 1.12
= INR 70,246.40
Future value of INR 50,000 compounded at 12% aer three years = INR 70,246.40
From Problem 3.3, it can be seen that the future value is calculated as follows:
If A is the amount of investment, r is the interest rate, and FV
1
is the future value aer one year or
FV
n
is the future value at the end of n years, then
FV
1
= A × (1 + r)
FV
2
= A × (1 + r)
2
FV
3
= A × (1 + r)
3
In general, the future value aer n years can be written as: ...