Derivatives MCQ - Derivatives Section 2

6 Rabia and Saman, two CFA candidates, make the following statements about an asset which neither pays interest nor divided. Also, there are no storage costs associated with the asset. Rabia: Just before termination, the value of a forward on that asset is zero. Saman: At initiation, the price of a forward contract on that asset is greater than the value of the contract. Which of the following is correct?

The value of a forward contract at initiation is zero; therefore, the forward price is greater than the value of the forward contract at initiation. Just before termination, the value of the forward contract will be equal to the spot price minus the forward price.

7 Ali, a CFA candidate, makes the following statements: Statement I: Price of a forward contract fluctuates due to changes in market conditions Statement II: Value of a forward contract fluctuates due to changes in market conditions Which of the following is correct?

Only the value of the forward contract will adjust as market conditions change. The forward price is fixed at the initiation of the contract

8 The value of the forward contract at expiration is equal to the:

The holder of the forward contract gains the difference between the price of the underlying and the forward price.

9 The price of a forward contract is decided:

The price of a forward contract is decided at the initiation of the contract.

10 A portfolio manager is required to buy 25,000 shares of Biz Corp. in a month. She fears that the price will rise during the coming month, so she contacts a dealer and enters into an equity forward contract to buy 25,000 shares of Biz Corp. at $20 a share. When the contract expires, the price is $22 per share. At expiration who benefits and by how much?

Since the portfolio manager takes a long position and the price goes up, she benefits. The benefit is 25,000 * (22 – 20) = 50,000.