Chapitre 5 - Manuel

Question 1

Forward price and futures of an asset are usually ___ when ___

Answer 1

Forward price and futures of an asset are usually very close when the maturities are the same

Question 2

True or false : we can use arbitrage arguments to determine the forward and futures price of a consuption asset

Answer 2

False : investment assets only

Question 3

If at any time, the broker has to return the borrowed shares while the coontract is open and there are no other shares that can be borrowed, what does the investor has to do ?

Answer 3

• The investor is forced to close out the positin (fee charged often)
• Has to pay the broker any income that would be received on the securities that have been shroted (dividends or interests)

Question 4

If the interest rate offered on the margin accunt is unacceptable, what can be used to meet margin requirements ?

Answer 4

Marketable securities (ex: Treasury bills)

Question 5

What can arbitrageurs d when

A) F₀ > F₀ theoric ?

B) F₀ < F₀ theoric ?

Answer 5

A) Buy the asset and short forward contracts on the asset

B) Sell / short the asset and enter intoo long forward contracts on it

Question 6

Why is the forward price higher than the spot price ?

Answer 6

Because of the cost of financing the spot purchase of the asset during the life of the forward contract

Question 7

When is a known yield ? (not income

Answer 7

When expressed as percent of the asset’s price at the time the income is paid

Question 8

When a futures price changes, the gain or lsos on a futures contract is calculated as ___

Answer 8

When a futures price changes, the gain or lsos on a futures contract is calculated as the change in the futures price multiplied by the size of the position

Question 9

When a price changes, the gain or lsos on a futures contract is ___

Question 10

What happens where there is a positive correlation between the price S of the underlying asset and the interest rates (3) ?

Answer 10

• When the S increases, the gains increases = interest rates increases
• The gains will be invested at a higher than average rate of interest
• Futures price > Forward price

Question 11

What happens where there is a negative correlation between the price S of the underlying asset and the interest rates (3) ?

Answer 11

When S decreases, the loss increases = interest rate decreases

• Loss is financed at a lower than average rate of interest
• Futures price < Forward price

Question 12

Why would a long futures contract be more attractive than a long forward contract ?

Answer 12

An investor holding a frward contract rather than a futures contract is not affected by interest wrates movements

Question 13

True or false : dividendes prvide a known cash income

Answer 13

False : dividendes prvide a known yield

Question 14

The dividendes used for estimating q should be those for which ___

Answer 14

The dividendes used for estimating q​ should be those for which ex-dividend date is during the life of the futures contract

Question 15

What happens to settlement futures prices for currencies when r>rf?

Answer 15

Settlement futures prices for currencies increase with the life of the contract

Question 16

What happens to settlement futures prices for currencies when r<rf></rf>

Answer 16

Settlement futures price for currencies decrease with the life of the futures cntract

Question 17

What is the yield regarding a foreign currency ?

Answer 17

Risk-free rate of interest in the foreign currency

Question 18

Convenience yield : definition

Answer 18

Benefits from holding the physcoal asset

Question 19

What shuld be the convenience yield for investment assets ?

Answer 19

Zer obecause otherwise there are arbitrage opportunities

Question 20

What is the market expecting when :

A) expected spt price < futures price ?

B) expected spt price > futures price ?

Answer 20

A) Expecting the futures price is going to decline so that traders with short poosition gain and traders with lng poosition lse

B) Expecting the futures pirce is going to rise so that traders with short position lose and traders with the long position gain

Question 21

Systematic risk vs Non-systematic risk (3 v 3)

Answer 21

Systematic risk

• Cannot be diversified away
• Crrelation between return from the invest and returns from the stock market
• An investor generally requires a higher expected return

Non-systematic risk

• Should not be important to the investor
• Can almost be completely eliminated
• An investor should not require a higher expected return

Question 22

When the asset underlying the futures contract has psitive systematic risk(k>r), we should expect the futures price to __ the expected future spot a

Answer 22

When the asset underlying the futures contract has psitive systematic risk (k>r), we should expect the futures price to understate the expected future spot price

F₀ < E(S_T)

Question 23

When the asset underlying the futures contract has negative systematic risk (k<r></r>

Answer 23

When the asset underlying the futures contract has negative systematic risk overstate the expected future spot price

F0 > E(ST)