Quiz 3 Determination of Forward & Future Prices

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?

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, to the nearest cent, is the three-year forward price?

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? Give four decimal places

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 to the nearest cent is the value of the short forward contract?

The spot price of an asset is positively correlated with the market. Which of the following would you expect to be true (circle one)

• The forward price equals the expected future spot price.

• The forward price is greater than the expected future spot price.

• The forward price is less than the expected future spot price.

• The forward price is sometimes greater and sometimes less than the expected future spot price.

The one-year Canadian dollar forward exchange rate is quoted as 1.0500. What the corresponding futures quote? Give four decimal places

Which of the following is a consumption asset (circle one)

• The S&P 500 index

• The Canadian dollar

• Copper

• IBM shares

Which of the following is true (circle one)

• The convenience yield is always positive or zero.

• The convenience yield is always positive for an investment asset.

• The convenience yield is always negative for a consumption asset.

• The convenience yield measures the average return earned by holding futures contracts.

If the convenience yield is high, what can be inferred about the asset's storage costs? (circle one)

• The storage costs are low.

• The storage costs are high.

• The storage costs have no impact on the convenience yield.

• The storage costs are variable and unpredictable.

Which of the following best describes a forward contract? (circle one)

• A contract to buy or sell an asset at a future date for a predetermined price.

• A contract that allows the holder to buy an asset at the current market price.

• A contract that guarantees a profit regardless of market conditions.

• A contract that can only be settled in cash.