Derivatives - Derivatives Section 2
- Option : B
- Explanation : If the present value of convenience yield exceeds the present value of its storage costs, then the commodity’s forward price is less than the spot price compounded at the risk-free rate.
22. Which of the following best describes the price of a forward contract?
23. The forward rate of an FRA is equal to the:
- Option : C
- Explanation : This FRA expires in 30-days and is based on a 90-day loan which starts on day 30. The forward rate represents the rate which can be locked in today for a 90-day loan starting 30-days from today. This rate is calculated based on the 30-day spot rate and the 120-day spot rate.
25. Ignoring the time value of money, the forward contract payoffs will be:
- Option : C
- Explanation : Forward payoffs occur all at expiration, whereas futures payoffs occur on a day-to-day basis but would equal forward payoffs ignoring interest.
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