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