I_SS17_R61_Forward_Markets_and_Contracts

Question 1

Forward contract is an agreement

Answer 1

between two parties in which one party, the buyer, agrees to buy from the other party, the seller, an underlying asset or other derivative, at a future date at a price established at the start of the contract.

Question 2

A forward contract hedge

Answer 2

locks in a price

Question 3

At start of forward contract

Answer 3

no money changes hands

Question 4

Two ways of handling a forward on expiry

Answer 4

delivery or cash settlement

Question 5

Cash-settled forward contracts are sometimes called

Answer 5

NDFs: nondeliverable forwards. Mainly in regards to foreign exchange forwards

Question 6

Forward contracts are subject to

Answer 6

default regardless of whether it is for delivery or cash settlement

Question 7

Forward contracts are generally structured so that in the event of a default

Answer 7

only the party owing the greater amount can default

Question 8

Forward contract nearly always constructed so that participants

Answer 8

will hold on to their positions until the contract expires

Question 9

Dealers in forwards engage in transactions with

Answer 9

end users and other dealers

Question 10

Interest rate forwards are called

Answer 10

forward rate agreements (FRAs)

Question 11

Equity forward is a contract calling for the purchase of

Answer 11

an individual stock, a stock portfolio or a stock index at a later date

Question 12

Equity forward contracts typically do not pay

Answer 12

dividends paid by the component stocks. Exceptions are equity forwards based on total return indices

Question 13

Bond forward contracts can be based on

Answer 13

an individual bond, specific bond portfolio or a bond index

Question 14

A forward contract on a bond must expire

Answer 14

prior to the bond’s maturity date

Question 15

A forward contract on a bond, unlike an equity, carries the

Answer 15

risk of default

Question 16

T-bills are typically sold at a

Answer 16

discount from par value and the price is quoted in terms of the discount rate. 180-day T-bill selling at a 4% discount has a price per $1 par of $1 - (0.04)(180/360) = $0.98. 360 is the convention for the discount

Question 17

A T-bill is traded by quoting the

Answer 17

discount rate, not the price.

Question 18

Price of 90-day T-bill selling in 60 days trading at a 4.2% discount

Answer 18

$1 - 0.042(90/360) = $0.9895

Question 19

U.S. Treasury bonds are typically quoted

Answer 19

without the interest that has accrued since the last coupon date

Question 20

Eurodollar is

Answer 20

dollar deposited outside the United States

Question 21

LIBOR

Answer 21

London Interbank Offer Rate. Commonly used in derivative contracts

Question 22

LIBOR is the rate at which

Answer 22

London banks lend dollars to other London banks

Question 23

LIBOR is considered the best representative rate on a dollar borrowed by a

Answer 23

private, nongovernmental, high-quality borrower

Question 24

If LIBOR loan is for $10 million for 30 days at 5.25% in 30 days will owe

Answer 24

$10,000,000 (1 + 0.0525(30/360)) = $10,043,750

Question 25

Day convention in Eurodollar market is to prorate the quoted interest rate over

Answer 25

360 days as in the case of the Treasury bill market

Question 26

Eurosterling

Answer 26

trades in Tokyo

Question 27

Euroyen

Answer 27

trades in London

Question 28

Euribor trades in

Answer 28

Frankfurt and is more widely used than EuroLIBOR which is compiled in London

Question 29

FRAs are contracts in which the underlying is neither a

Answer 29

bond nor a Eurodollar or Euribor deposit but simply an interest payment made in dollars

Question 30

A user who is long a FRA when rates rise

Answer 30

will benefit. The dealer is short the rate and will benefit if rates decrease

Question 31

3x9 FRA means

Answer 31

Contract expires in 3 months at which point the underlying rate is for 9-3=6 month (180-day) LIBOR

Question 32

1x3 FRA means

Answer 32

Contract expires in 1 month at which point the underlying rate is based on 3-1=2 month (60-day) LIBOR

Question 33

12x18 FRA means

Answer 33

Contract expires in 12 months at which point the underlying rate is based on 18-12=6 month (180-day) LIBOR

Question 34

Most commonly traded Eurodollar rates

Answer 34

30-day, 60-day, 90-day and 180-day LIBOR

Question 35

Non-standard FRAs are called

Answer 35

off the run

Question 36

Which market is bigger: FRA or swaps?

Answer 36

FRA market is large but not as large as the swaps market

Question 37

A swap is a special combination of

Answer 37

Forward rate agreements (FRAs)

Question 38

Common FRA notations

Answer 38

Question 39

Present value of a 180-day LIBOR Eurodollar time deposit for 6% on $10,000,000 paid in 180-days

Answer 39

Question 40

Amount received from dealer on 90-day FRA for 5.5% based on 180-day LIBOR which ends up being 6% at the expiration in 90 days

Answer 40

Question 41

General FRA payoff formula

Answer 41