Derivatives - Derivatives Section 2

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17. The short party of a forward contract is most likely expecting that the price of the underlying asset will:

  • Option : B
  • Explanation : The short party of a forward contract is most likely expecting that the price will go down. On the other hand, the long party is expecting that the price will go up.
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19. PSO and NRL stocks are currently priced at PKR 250 per share. Over the next year, PSO stock is expected to pay dividends whereas NRL stock is not expected to pay dividends. There are no carrying costs associated with holding either stock over the next year. Compared with PSO, the one-year forward price of NRL is most likely:

  • Option : B
  • Explanation : The forward price of each stock is found by compounding the spot price by the risk-free rate for the period and then subtracting the future value of any benefits and adding the future value of any costs. In the absence of any benefits or costs, the one-year forward prices of PSO and NRL should be equal. After subtracting the benefits related to PSO, the one-year forward price of PSO is lower than the one-year forward price of NRL.
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