Cost of carry

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This is a question from 2006 FRM exam:

Consider a 6-month future on sp500 index. the dividend yield is 1.5% per year, and the interest rate is 5% per year. what's is the cost of carry for the future?

I thought the answer was 2%, but the real answer is 4%. does the cost of carry have to be annualized?

 

[David Harper CFA FRM]

Vincent,

I assume you mean the interest rate is 5.5%, such that c = r - q = 5.5% - 1.0% = 4.0% per annum.
As the reference is Hull, FRM does typically express the carry (or interest rate, or dividend, or convenience yield for that matter) as an annual. Partly because the compound frequency is continuous and so it's natural; in this case, F0 = S0*exp[(5.5% - 4.0%)*0.5 years]; i.e., when continuous, future value = PV*exp(rT) such that r is per annum. David