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Derivatives MCQ - Derivatives Section 2

31 A trader takes a short position in 10 futures contracts at the start of Day 1. The futures price at this stage is $82. The closing price on Day 1 is $75. What amount is added or taken away from the trader’s account?

The trader has a short position so the fall in price helps him. He will receive: (82 – 75) * 10 = $70.

32 Which of the following is most likely true with respect to forward and futures contracts?

Option A is incorrect because credit risk is virtually non-existent only for futures contracts. Option B is incorrect because only forward contracts are executed between private parties. Option C is correct.

33 Which of the following conditions will most likely make futures prices and forward prices equivalent?

Forward prices and futures prices are equivalent when there is no correlation between futures prices and interest rates.

34 Which of the following statements is most accurate?

Each implicit forward contract is said to be off-market, because it is created at the swap price, not the appropriate forward price, which would be the price created in the forward market.

35 If the present value of the payments in a forward contract or swap is not zero, then:

Such a contract can legally be created, but the party receiving the greater present value must compensate the other party with a cash payment at the start.

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Question:

Which of the following statements is most accurate?

A. A swap is equivalent to a series of forward contracts, each created at the swap price.
B. A swap is equivalent to a series of long forward contracts, matched with short future contracts.
C. A swap is equivalent to a series of forward contracts, each created at their appropriate forward prices.

Correct answer: A

Explanation:

Each implicit forward contract is said to be off-market, because it is created at the swap price, not the appropriate forward price, which would be the price created…

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