Module 49.1: Forwards and Futures Valuation

Question 1

What is a risk-averse and risk-neutral investor?

Answer 1

risk-averse would require a positive premium on risky assets.

rusk-neutral would discount risky assets at the risk free rate.

Question 2

What is the formula to determine the value of a forward contract before expiration?

Answer 2

Vt (T) = St - F0T / (1 +rf) ^T-t

St = spot price
F0T = forward contract price
T = length of total forward contract
t = value as of date

Question 3

what is the formula to ensure the value of either a long or short forward contract is zero at initiation?

Answer 3

F0(T) = S0 x (1 + rf)^t

Question 4

What is convenience yield?

Answer 4

non-monetary benefits of holding an asset.

Question 5

What is the formula for price of a forward contract if costs exist and no benefits?

Answer 5

F0(T) = [S0 + PV(cost)] * (1+rf)^t

Question 6

What is the formula for price of a forward contract if benefits exist and no additional cost?

Answer 6

F0(T) = [S0 - PV(benefit)] * (1+rf)^t

Question 7

What is the formula for price at initiation of a forward contract if benefits and cost exists?

Answer 7

F0(T) = [S0 + PV(cost) - PV(benefit)] * (1+rf)^t

Question 8

What is the formula for price during life of a forward contract if benefits and cost exists?

Answer 8

Vt(T) = St + PVt(cost) - PVt(benefit) - F0T / (1 +rf)^T-t

Question 9

When net benefits outweigh net costs, what is the correct term to use?

Answer 9

net carry, or simply carry is positive if benefits outweigh the costs.