Derivatives MCQ - Derivatives Section 2

11 NIT fund manager is required to sell 35,000 shares of NRL in three months. He is concerned the price of NRL shares will decline during the 3- month period, so he enters into a deliverable equity forward contract with HBL to sell 35,000 shares of NRL in three months for PKR 250 per share. When the contract expires, NRL is trading at PKR 200 per share. The fund manager will most likely:

The fund manager entered into a contract to sell the stock to HBL at PKR 250 per share in 3 months’ time. 35,000 * PKR 250 = PKR 8,750,000. Option B is correct because it is a deliverable contract. If it was a cash settled contract, then option C would be correct.

12 NIT fund manager is required to sell 35,000 shares of NRL in three months. He is concerned the price of NRL shares will decline during the 3-month period, so he enters into an equity forward contract with HBL to sell 35,000 shares of NRL in three months for PKR 250 per share. When the contract expires, NRL is trading at PKR 200 per share. The fund manager will most likely:

Since it is a cash settled contract, the fund manager will receive 35,000 * PKR (250 - 200) = PKR 1,750,000. Option B is correct only if it is a deliverable contract.

13 Analyst 1: The value of a forward prior to expiration is the value of the asset minus the forward price.
Analyst 2: The value of a forward prior to expiration is the value of the asset minus the present value of the forward price.
Which analyst’s statement is most likely correct?

The value of a forward contract prior to expiration is the value of the asset minus the present value of the forward price.

14 The forward price is least likely affected by:

How the investor feels about risk is irrelevant, because the forward price is determined by arbitrage.

15 Which of the following factors increases the forward price of a commodity?

The convenience yield and interest income are benefits of holding the asset which are subtracted from the compounded spot price and reduces the commodity’s forward price. The opportunity cost is the risk-free rate, which increases the commodity’s forward price.