FINE 342 Lecture Notes - Lecture 4: Forward Contract, Futures Contract, Forward Price

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21 Jun 2017

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What futures contracts are, how to use forwards and futures for hedging purposes. Derivatives derive value from prices of other assets. Derivatives are securities that derive their value from the price of other assets. Spot contract: contract for immediate sale and delivery of an asset. Forward contract: non-standardised contract between two parties for delivery of an asset at negotiated price on some future date. Futures contract: contract similar to a forward contract except: (1) standardised contract; (2) intermediary creates standardised contract so no need to negotiate the terms of the contract: forward contract. Forward contract is obligation to transact in future. Agreement between buyer and seller of a product: quantity, price, maturity, delivery site, duty to respect the conditions of contract, no money changes hands before delivery date. Gain of buyer is loss of seller and vice versa. Today: forward on 100 oz. of gold in 3 months at ,000/oz. Cash flows of individual with long position: buy 100 oz.

Related Questions

Compute the expected return of a portfolio given these three economic states, their likelihoods, and the potential returns:

Economic State Probability Return

Fast Growth 20.00% 30.00%

Slow Growth 50.00% 6.00%

Recession 30.00% -2.00%

Answer

		8.40%
		11.33%
		12.65%
		15.47%

Compute the standard deviation of a portfolio given these three economic states, their likelihoods, and the potential returns:

Economic State Probability Return

Fast Growth 20.00% 30.00%

Slow Growth 50.00% 6.00%

Recession 30.00% -2.00%

Answer

1.28%

4.36%

7.82%

11.34%

Year-to-date, Company O had earned -2.10% return. During the same time period Company V earned 8.00% and Company M earned 6.25%. If you have a portfolio made up of 40.00% Company O, 30.00% Company V, and 30.00% Company M, what is the overall portfolio return?

Answer

5.778%

4.270%

6.871%

3.435%

Risk that CAN BE eliminated through proper diversification is called _____.

Answer

		market risk
		firm-specific risk
		systematic risk
		non-diversifiable risk

GIVEN: Spot Rate: 1 X = 1.02 Y
30 Day Forward Rate: 1 X = 1.15 Y
Your currency is "X" and you will be paying 345Y. You would ____ because _____.

Answer

		pay now; of the irrelevance of payment time
		pay now; it will take less "X"
		pay in 30 days; it will take less "X"

The amount of one currency needed to purchase one unit of another currency is the _____.

Answer

		derivative rate
		exchange rate
		backwardation rate
		over-the-counter rate

The price of an option is called a(n) _____.

Answer

		expiration cost
		holding cost
		premium
		proceeds

When a futures contract expires, the parties usually _____.

Answer

		have a party when losses are low
		take delivery of the contract asset
		do a cash settlement
		swap off liabilities.

When a forward contract expires, the parties will _____.

Answer

		have a party when losses are low
		deliver the contract asset
		do a cash settlement
		swap off liabilities.

Any asset whose value is derived from the value of some underlying asset is a(n) ____.

Answer

		derivative
		primary capital
		spot asset
		intermediary asset

Which of the following is not traded on an exchange?

Answer

		options
		futures
		forwards
		they are all exchange-traded

A system under which a country's exchange rates are tied to another currency by government policy is _____.

Answer

		floating exchange rates
		pegged exchange rates
		convertible exchange rates
		forward rates

One of the _______ for business with a floating exchange rate system is the _______ planning business activities in an international market.

Answer

		disadvantages; difficulty of
		advantages; easiness of
		irrelevant situations; normal
		none of the above

U.S. dollars deposited in foreign banks are called _____ and interest paid on these deposits is normally tied to _____.

Answer

		non-foreign deposits; FED funds rate
		indirect dollars; Discount Funds Rate
		Eurodollars; LIBOR
		none of the above

____ is a disadvantage of the gold standard.

Answer

		Excess currency slowing economic growth
		Excess inflation
		A non-variable beta
		Lack of currency to promote continued economic expansion

A monetary system in which paper money can be converted directly to gold is a(n) ___.

Answer

		dollar backed float
		gold standard
		currency float
		Americanized gold standard
		none of the above

Reason(s) for the Great Depression following the Great War include:

Answer

		trade protectionism
		isolationism
		nationalism
		all of the above
		none of the above

An agreement between the WW II allies in 1944 designed to prevent the problems leading to the Great Depression and WW II and to rebuild Asia and Europe was the _____.

Answer

		Armistice of 1945
		Bretton Woods Agreement
		Lend Lease Act for Asia and Europe
		none of the above

A derivative is used to ____ thereby _____.

Answer

		float; gaining excess currency for expansion
		peg currency; improving trade with a primary partner
		hedge; reducing/eliminating risk
		none of the above

Easier business planning is an advantage of the ______ system.

Answer

		mixed exchange rate
		floating exchange rate
		derivative exchange rate
		gold standard
		none of the above

____ is the chance that some unfavorable event will occur.

Answer

		Expected return
		Risk
		Coefficient of variation
		Correlation

raspberrycicada573

Compute the expected return of a portfolio given these three economic states, their likelihoods, and the potential returns:

Economic State Probability Return

Fast Growth 20.00% 30.00%

Slow Growth 50.00% 6.00%

Recession 30.00% -2.00%

Answer

		8.40%
		11.33%
		12.65%
		15.47%

Compute the standard deviation of a portfolio given these three economic states, their likelihoods, and the potential returns:

Economic State Probability Return

Fast Growth 20.00% 30.00%

Slow Growth 50.00% 6.00%

Recession 30.00% -2.00%

Answer

		1.28%
		4.36%
		7.82%
		11.34%

Year-to-date, Company O had earned -2.10% return. During the same time period Company V earned 8.00% and Company M earned 6.25%. If you have a portfolio made up of 40.00% Company O, 30.00% Company V, and 30.00% Company M, what is the overall portfolio return?

Answer

		5.778%
		4.270%
		6.871%
		3.435%

Risk that CAN BE eliminated through proper diversification is called _____.

Answer

		market risk
		firm-specific risk
		systematic risk
		non-diversifiable risk

GIVEN: Spot Rate: 1 X = 1.02 Y
30 Day Forward Rate: 1 X = 1.15 Y
Your currency is "X" and you will be paying 345Y. You would ____ because _____.

Answer

		pay now; of the irrelevance of payment time
		pay now; it will take less "X"
		pay in 30 days; it will take less "X"

The amount of one currency needed to purchase one unit of another currency is the _____.

Answer

		derivative rate
		exchange rate
		backwardation rate
		over-the-counter rate

The price of an option is called a(n) _____.

Answer

		expiration cost
		holding cost
		premium
		proceeds

When a futures contract expires, the parties usually _____.

Answer

		have a party when losses are low
		take delivery of the contract asset
		do a cash settlement
		swap off liabilities.

When a forward contract expires, the parties will _____.

Answer

		have a party when losses are low
		deliver the contract asset
		do a cash settlement
		swap off liabilities.

Any asset whose value is derived from the value of some underlying asset is a(n) ____.

Answer

		derivative
		primary capital
		spot asset
		intermediary asset

Which of the following is not traded on an exchange?

Answer

		options
		futures
		forwards
		they are all exchange-traded

A system under which a country's exchange rates are tied to another currency by government policy is _____.

Answer

		floating exchange rates
		pegged exchange rates
		convertible exchange rates
		forward rates

One of the _______ for business with a floating exchange rate system is the _______ planning business activities in an international market.

Answer

		disadvantages; difficulty of
		advantages; easiness of
		irrelevant situations; normal
		none of the above

U.S. dollars deposited in foreign banks are called _____ and interest paid on these deposits is normally tied to _____.

Answer

		non-foreign deposits; FED funds rate
		indirect dollars; Discount Funds Rate
		Eurodollars; LIBOR
		none of the above

____ is a disadvantage of the gold standard.

Answer

		Excess currency slowing economic growth
		Excess inflation
		A non-variable beta
		Lack of currency to promote continued economic expansion

A monetary system in which paper money can be converted directly to gold is a(n) ___.

Answer

		dollar backed float
		gold standard
		currency float
		Americanized gold standard
		none of the above

Reason(s) for the Great Depression following the Great War include:

Answer

		trade protectionism
		isolationism
		nationalism
		all of the above
		none of the above

An agreement between the WW II allies in 1944 designed to prevent the problems leading to the Great Depression and WW II and to rebuild Asia and Europe was the _____.

Answer

		Armistice of 1945
		Bretton Woods Agreement
		Lend Lease Act for Asia and Europe
		none of the above

A derivative is used to ____ thereby _____.

Answer

		float; gaining excess currency for expansion
		peg currency; improving trade with a primary partner
		hedge; reducing/eliminating risk
		none of the above

Easier business planning is an advantage of the ______ system.

Answer

		mixed exchange rate
		floating exchange rate
		derivative exchange rate
		gold standard
		none of the above

____ is the chance that some unfavorable event will occur.

Answer

		Expected return
		Risk
		Coefficient of variation
		Correlation

pucedolphin819

Question 1

The correlation of stock market returns between the U.S. and Japan is ____ and ____.

High, increasing.

High, decreasing.

Low, increasing.

Low, decreasing.

Low, remaining constant.

Question 5

Which of the following is not a reason given for why forecaster are so often incorrect?

There is a temptation for economic forecasters to stay fairly close to the "norm," that is, "group think."

Many analysts are simply too short-sighted.

Economists and economic forecaster often suffer from information overload.

Some economic forecasters are too broad-minded, trying to include a number of ideas in their forecasts.

None of the above (that is, all are reasons cited for why forecasters are often incorrect)

Question 6

Which of the following statements concerning asset allocation is false?

Diversification across international boundaries can improve risk-adjusted portfolio returns.

Economies expected to grow at an above-average rate with above-average profit growth should be considered as candidates to overweight in a global portfolio.

Severe currency blockages should not impact global diversification selections.

Portfolio allocation among asset classes may provide higher portfolio returns while lowering portfolio risk levels.

None of the above (that is, all statements are true).

Question 17

Defensive companies are firms where

Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy.

Sales, earnings and cash flows are likely to withstand changes caused by the economic environment.

Sales, earnings and cash flows are heavily influenced by aggregate business activity.

Sales, earnings and cash flows are growing exponentially.

None of the above.

Question 18

Speculative companies are firms where

Sales, earnings and cash flows are extremely uncertain and not necessarily related to the economy.

Sales, earnings and cash flows are likely to withstand changes caused by the economic environment.

Sales, earnings and cash flows are heavily influenced by aggregate business activity.

Sales, earnings and cash flows are growing exponentially.

None of the above.

Question 19

A firm that follows a defensive competitive strategy could

Lower production costs.

Create a strong brand image.

Use its buying power to obtain price concessions.

a and b

b and c

Question 22

A growth company can invest in projects that generate a return greater than the firm's

Return on equity.

Cost of debt.

Cost of equity.

Cost of capital.

Return on assets.

Question 33

A bond denominated in U.S. dollars and sold in Japan to Japanese investors is called a

Samurai bond.

Eurobond.

Yankee bond.

Euroyen bond

Foreign bond.

Question 43

Futures contracts are similar to forward contracts in that they both

Have volatile price movements and strong interest from buyers and sellers.

Give the holder the option to make a transaction in the future.

Have similar liquidity.

Have similar credit risk.

None of the above.

Question 46

Which of the following is not considered a "cost of carry"?

Commissions for physical storage

An opportunity cost for the net amount of invested capital

A premium for the convenience of consuming the asset now

A risk premium for uncertainty

All of the above are considered costs of carry.

Question 48

The most popular financial futures in terms of average daily volume is the

OEX contracts.

S&P 500 contracts.

LIBOR contracts.

T-bill contracts.

T-bond contracts.

Question 49

The bond that maximizes the difference between the invoice price and the delivery price is referred to as the

Cheapest-to-deliver.

Conversion bond.

Delivery bond.

Cheapest to substitute.

Cost-of-carry.

Question 50

An investor who wants a long position in a ____ must first place the order with a broker, who then passes it on to the trading pit or electronic network. Details of the order are then passed on to the exchange clearinghouse.

Call option

Put option

Forward contract

Futures contract

None of the above

crimsonoyster639

FINE 342 Lecture Notes - Lecture 4: Forward Contract, Futures Contract, Forward Price

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