Reading 52: pricing and valuation of forward contracts and for an underlying with varying maturities Flashcards
Two parties agree to a forward contract to exchange 100 shares of a stock one year from now for $72 per share. Immediately after they initiate the contract, the price of the underlying stock increases to $74 per share. This share price increase represents a gain for:
the buyer.
the seller.
neither the buyer nor the seller.
If the value of the underlying is greater than the forward price, this increases the value of the forward contract, which represents a gain for the buyer and a loss for the seller. (LOS 52.a)
The forward rate F2,3 represents the interest rate on a loan for the period from:
year 2 to year 3.
year 2 to year 5.
year 3 to year 5.
F2,3 is the 2-year forward 3-year rate, covering a period that begins two years from now and extends for three years after that. (LOS 52.b)
Given zero-coupon bond yields for 1, 2, and 3 years, an analyst can least likely derive an implied:
1-year forward 1-year rate.
2-year forward 1-year rate.
2-year forward 2-year rate.
The forward rate F2,2 extends four years into the future and cannot be derived using zero-coupon yields that only extend three years. From zero-coupon bond yields for 1, 2, and 3 years, we can derive implied forward rates F1,1, F1,2, and F2,1. (LOS 52.b)
