Derivatives- Topic 4/ Forward contract

What is a forward contract?

• A financial instrument that pays interest.

• A standardized contract traded on an exchange.

• An option to buy or sell an asset at a future date at a price specified today.

• An agreement to buy or sell an asset at a future date at a price specified today.

Which of the following is true about a forward contract?

• It is traded on an exchange

• It is a standardized contract

• It is an over-the-counter (OTC) contract

• It is marked to market daily

In a forward contract, the price specified for future delivery is called the:

• Spot price

• Forward price.

• Exercise price

• Premium

The cost of carry in a forward contract refers to:

• The cost of transporting the underlying asset.

• The cost associated with holding the asset until the contract’s expiration.

• The cost of entering into the contract.

• • The transaction cost paid to the broker.

Which of the following best describes the outright forward in foreign exchange (FRX)?

• A contract for immediate delivery of foreign currency.

• A currency swap agreement.

• A contract for future delivery of foreign currency at a specified rate.

• A standardized futures contract for foreign currency.

What does the settlement of a forward contract involve?

• Daily margin adjustments

• Delivery of the underlying asset or cash equivalent at the contract’s maturity

• Closing the contract before maturity

• Paying a premium at contract initiation.

If the spot price of an asset is $100 and the forward price for a 1-year contract is $110, what does this imply about the cost of carry?

• The cost of carry is negative.

• The cost of carry is zero

• The cost of carry is $10.

• The cost of carry is $110.

Which of the following is NOT a component of the cost of carry?

• Storage costs

• Interest rates

• Dividend yields

• Broker fees

What is the primary purpose of using forward contracts?

• To speculate on price movements.

• To hedge against price fluctuations.

• To increase leverage.
  

• To avoid taxes.

Which of the following factors affect the forward price of a commodity?

• Storage costs

• Convenience yield

• Interest rates

• All of the above