Reading 71: Forward Markets and Contracts - LOS c ～ Q1-4 following, forward, black, style

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1.All of the following are typically end users of forward contracts EXCEPT:

A)   governmental units.

B)   corporations.

C)   non-profit institutions.

D)   a forwards dealer.

2.Which of the following statements regarding forward contract dealers is FALSE?

A)   Forward contract dealers are often banks.

B)   Large brokerage houses act as forward contract dealers.

C)   Dealers offer long and short forward contracts at different prices.

D)   Dealers are compensated through up-front payments by the parties to forward contracts.

3.Which of the following statements regarding forward contracts is FALSE?

A)   Dealers make the majority of their profits by anticipating price moves in the underlying asset.

B)   Dealers will enter into forward contracts with other dealers.

C)   End users of forwards most often have a business exposure to price risk from the asset covered by the contract.

D)   Forward contracts can be used to speculate on foreign exchange rates.

4.Which statement regarding forward contract dealers is FALSE?

A)   They bear default risk but not asset-price risk.

B)   Not all of them are banks.

C)   They may enter into contracts with other dealers.

D)   They try to balance their long and short positions to limit risk.

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答案和详解如下：

1.All of the following are typically end users of forward contracts EXCEPT:

A)   governmental units.

B)   corporations.

C)   non-profit institutions.

D)   a forwards dealer.

The correct answer was D)

A dealer is not an end user. Dealers typically take offsetting positions with different end users to limit their exposure to the asset price risk in individual forward contracts.

2.Which of the following statements regarding forward contract dealers is FALSE?

A)   Forward contract dealers are often banks.

B)   Large brokerage houses act as forward contract dealers.

C)   Dealers offer long and short forward contracts at different prices.

D)   Dealers are compensated through up-front payments by the parties to forward contracts.

The correct answer was D)

There is typically no payment from either the long or the short to enter into a forward contract. Dealers make money through the bid-ask spread, the difference between the forward prices they offer to buyers and sellers.

3.Which of the following statements regarding forward contracts is FALSE?

A)   Dealers make the majority of their profits by anticipating price moves in the underlying asset.

B)   Dealers will enter into forward contracts with other dealers.

C)   End users of forwards most often have a business exposure to price risk from the asset covered by the contract.

D)   Forward contracts can be used to speculate on foreign exchange rates.

The correct answer was A)

Dealers do not make most of their profits from speculating on price moves or interest rate moves. They profit from the bid-ask spread. They take offsetting positions with different end users to hedge their price risk.

4.Which statement regarding forward contract dealers is FALSE?

A)   They bear default risk but not asset-price risk.

B)   Not all of them are banks.

C)   They may enter into contracts with other dealers.

D)   They try to balance their long and short positions to limit risk.

The correct answer was A)

Dealers bear both default risk as well as asset-price risk from unhedged positions. Nonbank financial institutions can deal in forward contracts. Ideally, dealers will balance their long contract positions with other parties who seek the opposite risk exposure. Dealers often enter contracts with other dealers to hedge positions.