Reading 71: Forward Markets and Contracts - LOS d, (Part stocks, forward, contract, buyer, class

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1.The buyer (long) in a deliverable equity forward contract on a portfolio of stocks:

A)   is obligated to buy the portfolio in the future at the forward price.

B)   will profit on the contract if the price of the equity asset rises over the life of the contract.

C)   must deliver the portfolio at the expiration of the forward contract.

D)   will profit if the equity declines in price over the life of the contract.

2.An equity forward contract may be on all of the following assets EXCEPT a(n):

A)   bond.

B)   index.

C)   single stock.

D)   specific portfolio of five stocks.

3.The manager of a large equity portfolio is short a $10 million forward contract on the S& 500 Index at 1000. The index is currently 940 and at contract expiration, the index is 950. At expiration the manager:

A)   will receive a payment of $500,000.

B)   will make a payment of $105,263 since the index has increased 1.05263%.

C)   must pay the dividend yield on the index over the contract term.

D)   receives a payment of 50 times the contract multiplier at expiration.

4.Which statement about equity forward contracts is least likely accurate?

A)   Investors can use equity forward contracts to speculate on stock-price increases.

B)   Dividend payments are usually included in equity forward contracts.

C)   Equity index forward contracts are normally settled in cash.

D)   Equity forward contracts may require asset delivery or cash settlement.

5.A portfolio manager is long an equity index contract at 995.6 with a notional value of $40 million. If the index is at 969.2 on the settlement date, the amount the manager must pay is closest to:

A)   $1.09 million.

B)   $38.91 million.

C)   $41.06 million.

D)   $1.06 million.

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答案和详解如下：

1.The buyer (long) in a deliverable equity forward contract on a portfolio of stocks:

A)   is obligated to buy the portfolio in the future at the forward price.

B)   will profit on the contract if the price of the equity asset rises over the life of the contract.

C)   must deliver the portfolio at the expiration of the forward contract.

D)   will profit if the equity declines in price over the life of the contract.

The correct answer was A)

In a deliverable contract, the long is obligated to buy the portfolio at the forward price. The forward contract price will generally (except for a very high dividend paying portfolio) be higher than the current market price; a rise in price from the current level is no guarantee of profits on the contract.

2.An equity forward contract may be on all of the following assets EXCEPT a(n):

A)   bond.

B)   index.

C)   single stock.

D)   specific portfolio of five stocks.

The correct answer was A)

A forward contract on a bond is not an equity forward contract.

3.The manager of a large equity portfolio is short a $10 million forward contract on the S& 500 Index at 1000. The index is currently 940 and at contract expiration, the index is 950. At expiration the manager:

A)   will receive a payment of $500,000.

B)   will make a payment of $105,263 since the index has increased 1.05263%.

C)   must pay the dividend yield on the index over the contract term.

D)   receives a payment of 50 times the contract multiplier at expiration.

The correct answer was A)

The short position will receive $10 million times 5%, the amount by which the index is below the contract price at expiration (50/1000).

4.Which statement about equity forward contracts is least likely accurate?

A)   Investors can use equity forward contracts to speculate on stock-price increases.

B)   Dividend payments are usually included in equity forward contracts.

C)   Equity index forward contracts are normally settled in cash.

D)   Equity forward contracts may require asset delivery or cash settlement.

The correct answer was B)

Dividend payments are usually not included in equity forward contracts. Investors can use equity forwards to speculate on stock price movements. Most equity index forward contracts are settled in cash, but since they are custom instruments, forwards may specify either cash settlement or delivery of the equity shares specified in the contract.

5.A portfolio manager is long an equity index contract at 995.6 with a notional value of $40 million. If the index is at 969.2 on the settlement date, the amount the manager must pay is closest to:

A)   $1.09 million.

B)   $38.91 million.

C)   $41.06 million.

D)   $1.06 million.

The correct answer was D)

The actual index price is 2.6517 percent below the contract price (969.2/995.6-1=-2.6517%). Since the long manager agreed to pay the higher price but could only sell at the lower price, she must settle in cash for 2.6517 percent of the $40 million notional amount, or about $1.06 million.