Derivatives - Derivatives Section 2
16. Which of the following statements about the price of a forward contract is most accurate?
- A
Costs incurred and benefits received by holding the underlying affect the forward price by raising and lowering it, respectively.
- B
Costs incurred and benefits received by holding the underlying effect the forward price by lowering and raising it, respectively.
- C
Costs incurred and benefits received by holding the underlying do not affect the forward price.
- Option : A
- Explanation : Costs incurred and benefits received by holding the underlying affect the forward price by raising and lowering it, respectively.
- Option : B
- Explanation : The short party of a forward contract is most likely expecting that the price will go down. On the other hand, the long party is expecting that the price will go up.
- Option : C
- Explanation : For a stock that neither receives benefits nor incurs carrying costs during the term of the contract, the forward price is found by compounding the spot price at the risk-free rate over the life of the contract.
- Option : B
- Explanation : The forward price of each stock is found by compounding the spot price by the risk-free rate for the period and then subtracting the future value of any benefits and adding the future value of any costs. In the absence of any benefits or costs, the one-year forward prices of PSO and NRL should be equal. After subtracting the benefits related to PSO, the one-year forward price of PSO is lower than the one-year forward price of NRL.
- Option : A
- Explanation : An asset’s forward price is spot (1 + r) + costs – benefits = 100 * 1.1 + 5 – 2 = 113.
*/?>
*/?>
*/?>
*/?>