Chapter 5 Determination of Forward and Futures Prices

1)
Which of the following is a consumption asset?
A)
The S&P 500 index
B)
The Canadian dollar
C)
Copper
D)
IBM stock

2)
An investor shorts 100 shares when the share price is $50 and closes out the
position six months later when the share price is $43. The shares pay a
dividend of $3 per share during the six months. How much does the investor
gain?
A)
$1,000
B)
$400
C)
$700
D)
$300

3)
The spot price of an investment asset that provides no income is $30 and the
risk-free rate for all maturities (with continuous compounding) is 10%. What is
the three-year forward price?
A)
$40.50
B)
$22.22
C)
$33.00
D)
$33.16

4)
The spot price of an investment asset is $30 and the risk-free rate for all
maturities is 10% with continuous compounding. The asset provides an income of
$2 at the end of the first year and at the end of the second year. What is the
three-year forward price?
A)
$19.67
B)
$35.84
C)
$45.15
D)
$40.50

5)
An exchange rate is 0.7000 and the six-month domestic and foreign risk-free
interest rates are 5% and 7% (both expressed with continuous compounding). What
is the six-month forward rate?
A)
0.7070
B)
0.7177
C)
0.7249
D)
0.6930

6)
Which of the following is true?
A)
The convenience yield is always positive or zero
B)
The convenience yield is always positive for an investment asset
C)
The convenience yield is always negative for a consumption asset
D)
The convenience yield measures the average return earned by holding futures
contracts
7)
A short forward contract that was negotiated some time ago will expire in three
months and has a delivery price of $40. The current forward price for
three-month forward contract is $42. The three month risk-free interest rate
(with continuous compounding) is 8%. What is the value of the short forward
contract?
A)
+$2.00
B)
-$2.00
C)
+$1.96
D)
-$1.96

8)
The spot price of an asset is positively correlated with the market. Which of
the following would you expect to be true?
A)
The forward price equals the expected future spot price
B)
The forward price is greater than the expected future spot price
C)
The forward price is less than the expected future spot price
D)
The forward price is sometimes greater and sometimes less than the expected
future spot price

9)
Which of the following describes the way the futures price of a foreign
currency is quoted?
A)
The number of U.S. dollars per unit of the foreign currency
B)
The number of the foreign currency per U.S. dollar
C)
Some futures prices are always quoted as the number of U.S. dollars per unit of
the foreign currency and some are always quoted the other way round
D)
There are no quotation conventions for futures prices

10)
Which of the following describes the way the forward price of a foreign
currency is quoted?
A)
The number of U.S. dollars per unit of the foreign currency
B)
The number of the foreign currency per U.S. dollar
C)
Some forward prices are always quoted as the number of U.S. dollars per unit of
the foreign currency and some are always quoted the other way round
D)
There are no quotation conventions for forward prices

11)
Which of the following is NOT a reason why a short position in a stock is
closed out?
A)
The investor with the short position chooses to close out the position
B)
The lender of the shares issues instructions to close out the position
C)
The broker is no longer able to borrow shares from other clients
D)
The investor does not maintain margins required on his/her margin account

12)
Which of the following is NOT true?
A)
Gold and silver are investment assets
B)
Investment assets are held by significant numbers of investors for investment
purposes
C)
Investment assets are never held for consumption
D)
The forward price of an investment asset can be obtained from the spot price,
interest rates and the income paid on the asset
13)
What should a trader do when the one-year forward price of an asset is too low?
Assume that the asset provides no income.
A)
The trader should borrow the price of the asset, buy one unit of the asset and
enter into a short forward contract to sell the asset in one year
B)
The trader should borrow the price of the asset, buy one unit of the asset and
enter into a long forward contract to buy the asset in one year
C)
The trader should short the asset, invest the proceeds of the short sale at the
risk-free rate, enter into a short forward contract to sell the asset in one
year
D)
The trader should short the asset, invest the proceeds of the short sale at the
risk-free rate, enter into a long forward contract to buy the asset in one year

14)
Which of the following is NOT true about forward and futures contracts?
A)
Forward contracts are more liquid than futures contracts
B)
The futures contracts are traded on exchanges while forward contracts are
traded in the over-the-counter market
C)
In theory forward prices and futures prices are equal when there is no
uncertainty about future interest rates
D)
Taxes and transaction costs can lead to forward and futures prices being
different

15)
As the convenience yield increases, which of the following is true?
A)
The one-year futures price as a percentage of the spot price increases
B)
The one-year futures price as a percentage of the spot price decreases
C)
The one-year futures price as a percentage of the spot price stays the same
D)
Any of the above can happen

16)
As inventories of a commodity decline, which of the following is true?
A)
The one-year futures price as a percentage of the spot price increases
B)
The one-year futures price as a percentage of the spot price decreases
C)
The one-year futures price as a percentage of the spot price stays the same
D)
Any of the above can happen

17)
Which of the following describes a known dividend yield on a stock?
A)
The size of the dividend payments each year is known
B)
Dividends per year as a percentage of today’s stock price are known
C)
Dividends per year as a percentage of the stock price at the time when
dividends are paid are known
D)
Dividends will yield a certain return to a person buying the stock today
18)
Which of the following is an argument used by Keynes and Hicks?
A)
If hedgers hold long positions and speculators holds short positions, the
futures price will tend to be higher than expected future spot prices
B)
If hedgers hold long positions and speculators holds short positions, the futures
price will tend to be lower than expected future spot prices
C)
If hedgers hold long positions and speculators holds short positions, the
futures price will tend to be lower than today’s spot prices
D)
If hedgers hold long positions and speculators holds short positions, the
futures price will tend to be higher than today’s spot prices

19)
Which of the following describes contango?
A)
The futures price is below the expected future spot price
B)
The futures price is below today’s spot price
C)
The futures price is a declining function of the time to maturity
D)
The futures price is above the expected future spot price

20)
Which of the following is true for a consumption commodity?
A)
There is no limit to how high or low the futures price can be, except that the
futures price cannot be negative
B)
There is a lower limit to the futures price but no upper limit
C)
There is an upper limit to the futures price but no lower limit, except that
the futures price cannot be negative
D)
The futures price can be determined with reasonable accuracy from the spot
price and interest rates