Chapter 5 Determination of Forward and Futures Prices

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