clearlycanadian

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

A) non-profit institutions.

B) governmental units.

C) a forwards dealer.

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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.

clearlycanadian

Which of the following statements regarding forward contract dealers is NOT correct?

A) Forward contract dealers are often banks.

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

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

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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.

optiix

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

A) specific portfolio of five stocks.

B) index.

C) bond.

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

optiix

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

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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.

optiix

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

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

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

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

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The short position will receive $10 million times 5%, the amount by which the index is below the contract price at expiration (50 / 1,000).

optiix

Which statement about equity forward contracts is least accurate?

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

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

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

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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.

optiix

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) $41.06 million.

C) $1.06 million.

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The actual index price is 2.6517% 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% of the $40 million notional amount, or about $1.06 million.

optiix

Which of the following is least likely a characteristic of bond forward contracts?

A) Prices are stated as yield to maturity, including accrued interest.

B) Contracts can be written on bonds with embedded options.

C) Contracts must settle before the bond matures.

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Bond forward contracts are typically stated as a yield to maturity exclusive of accrued interest. Both of the other statements are characteristics of bond forward contracts.

optiix

The settlement price of a deliverable forward contract at 6% on a $1 million 90-day Treasury bill would be:

A) determined by the market rates at expiration.

B) $985,000.

C) $940,000.

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Treasury bills are quoted as a discount from face value, which is annualized based on a 360 day year. (90/360) × 6% = 1.5%, so the contract price of the $1 million bill is [1 − 0.015] × 1,000,000 = $985,000.

optiix

The price of a 90-day forward contract on a 90-day Treasury bill will be:

A) above the current price of a 90-day T-bill.

B) either above or below the current price of a 180-day T-bill.

C) above the current price of a 180-day T-bill.

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Since purchasing a 180-day T-bill today will result in a 90-day T-bill 90 days from now, the forward price must be higher than the current price of a 180-day T-bill. As long as interest rates are positive, no one would agree to sell a 180-day bill at a lower price 90 days later.