标题: Derivative Investments【Reading 54】Sample [打印本页]
作者: JoeyDVivre 时间: 2012-4-3 11:32 标题: [2012 L2] Derivative Investments【Session 16- Reading 54】Sample
The price of a forward contract: A)
| is the settlement price for the underlying asset. |
|
B)
| must be equal to the market price at contract termination. |
|
C)
| is equal to the value of the contract in equilibrium. |
|
The price of a forward contract is the price of the underlying asset that the long will pay to the short at settlement (for a deliverable contract). The value of a forward contract comes from the difference between the forward contract price and the market price for the underlying asset. This difference between price and value is a key concept to understand. A forward contract has only one price, which applies to both the long and to the short.
作者: JoeyDVivre 时间: 2012-4-3 11:32
The theoretical price of a forward contract: A)
| equals the long’s expectation of the future price of the underlying asset. |
|
B)
| is always greater than the current price of the underlying asset. |
|
C)
| is the no-arbitrage price. |
|
The theoretical price of a forward contract is the future price of the underlying asset imposed by the no-arbitrage conditions. It can be less than the current price of the asset if the cost-of-carry is negative. Accrued interest is paid by the long at delivery under a bond forward, but is not included in the price quote, which is usually in terms of yield to maturity at the settlement date.
作者: JoeyDVivre 时间: 2012-4-3 11:32
Which of the following best describes the price of a forward contract? The forward price is: A)
| the price that makes the values of the long and short positions zero at contract initiation. |
|
B)
| always equal to the market price at contract termination. |
|
C)
| always expressed in dollars. |
|
The forward price is the contract price of the underlying asset under the terms of the forward contract, and is the price that makes the values of the long and short positions zero at contract initiation. It is not the amount it costs to purchase the forward contract. The forward price is expressed in terms of the underlying asset, and may be a dollar value, exchange rate, or interest rate. The value of a forward contract comes from the difference between the forward contract price and the market price for the underlying asset. These values are likely to be different at contract termination, which will result in a profit for either the long or the short position.
作者: JoeyDVivre 时间: 2012-4-3 11:33
The price of a forward contract: A)
| changes over the term of the contract. |
|
B)
| depends on forward interest rates. |
|
C)
| is determined at contract initiation. |
|
The price of a forward contract is established at the initiation of the contract and is expressed in different terms, depending on the underlying assets. It is the price that makes the contract value zero, and depends on current interest rates through the cost-of-carry calculation.
作者: JoeyDVivre 时间: 2012-4-3 11:33
At expiration, the value of a forward contract is: A)
| the difference between the contract price and the market value of the underlying asset. |
|
B)
| equal to the market price of the underlying asset. |
|
C)
| always greater than or equal to zero. |
|
In a forward contract, the long is obligated to buy, and the short is obligated to sell, the underlying asset at the contract price. The difference between the contract price and the market price of the asset is what gives the contract value. The contract has a positive value at expiration to the long/short only if the contract price is below/above the market price.
作者: JoeyDVivre 时间: 2012-4-3 11:33
At contract initiation, the value of a forward contract: A)
| depends on the market price of the underlying asset. |
|
B)
| is typically zero regardless of the price of the underlying asset. |
|
C)
| is set to 100 by convention. |
|
Due to the no-arbitrage principle, the price of a forward contract is calculated to make the value of the contract zero at contract initiation. Neither the long nor the short typically makes any payment to enter into the forward agreement. A special case is an off-market forward where, for whatever reason, the contract price is not set equal to the no-arbitrage price, and the long or short position makes a payment to the opposite counterparty to offset the difference.
作者: JoeyDVivre 时间: 2012-4-3 11:34
During the life of a forward contract, the value of the contract is best described as: A)
| the difference between the future value of the spot price and the expected future price of the underlying asset. |
|
B)
| the difference between the spot price and the present value of the forward price of the underlying asset. |
|
C)
| the present value of the expected future price of the underlying asset. |
|
The value of a forward contract on an asset with no cash flows during its term is equal to spot − (forward price) / (1 + Rf)t), the difference between the spot price and the present value of the forward price of the underlying asset.
作者: JoeyDVivre 时间: 2012-4-3 11:34
The contract price of a forward contract is: A)
| always the present value of the expected future spot price. |
|
B)
| determined at the settlement date. |
|
C)
| the price that makes the contract a zero-value investment at initiation. |
|
The contract price can be an interest rate, discount, yield to maturity, or exchange rate. The forward price is the future value of the spot price adjusted for any periodic payments expected from the asset. An example of when the forward price may be less than the spot price is in the case of an equity index contract where the dividend yield is greater than the risk-free rate.
作者: JoeyDVivre 时间: 2012-4-3 11:35
The forward price in a 90-day forward contract on a non-dividend-paying stock currently (at contract initiation) selling for $55 when the 90-day risk-free rate is 5% is closest to:
作者: JoeyDVivre 时间: 2012-4-3 11:35
A portfolio manager holds 100,000 shares of IPRD Company (which is trading today for $9 per share) for a client. The client informs the manager that he would like to liquidate the position on the last day of the quarter, which is 2 months from today. To hedge against a possible decline in price during the next two months, the manager enters into a forward contract to sell the IPRD shares in 2 months. The risk-free rate is 2.5%, and no dividends are expected to be received during this time. However, IPRD has a historical dividend yield of 3.5%. The forward price on this contract is closest to:
The historical dividend yield is irrelevant for calculating the no-arbitrage forward price because no dividends are expected to be paid during the life of the forward contract. In the absence of an arbitrage opportunity, the value of 
should be 0.
Therefore, FP = S0(1 + Rf)T
903,712 = 900,000(1.025)2/12
作者: JoeyDVivre 时间: 2012-4-3 11:35
Calculate the no-arbitrage forward price for a 90-day forward on a stock that is currently priced at $50.00 and is expected to pay a dividend of $0.50 in 30 days and a $0.60 in 75 days. The annual risk free rate is 5% and the yield curve is flat.
The present value of expected dividends is: $0.50 / (1.0530 / 365) + $0.60 / (1.0575 / 365) = $1.092
Future price = ($50.00 − 1.092) × 1.0590 / 365 = $49.49
作者: JoeyDVivre 时间: 2012-4-3 11:36
An index is currently 965 and the continuously compounded dividend yield on the index is 2.3%. What is the no-arbitrage price on a one-year index forward contract if the continuously compounded risk-free rate is 5%.
The futures price FP = S0 e-δT (eRT)
= S0 e(R-δ)T
= 965e(.05-.023)
= 991.4
作者: JoeyDVivre 时间: 2012-4-3 11:36
Jim Trent, CFA has been asked to price a three month forward contract on 10,000 shares of Global Industries stock. The stock is currently trading at $58 and will pay a dividend of $2 today. If the effective annual risk-free rate is 6%, what price should the forward contract have? Assume the stock price will change value after the dividend is paid.
One method is to subtract the future value of the dividend from the future value of the asset calculated at the risk free rate (i.e. the no-arbitrage forward price with no dividend).
FP = 58(1.06)1/4 – 2(1.06)1/4 = $56.82
This is equivalent to subtracting the present value of the dividend from the current price of the asset and then calculating the no-arbitrage forward price based on that value.
作者: JoeyDVivre 时间: 2012-4-3 11:36
The value of the S&P 500 Index is 1,260. The continuously compounded risk-free rate is 5.4% and the continuous dividend yield is 3.5%. Calculate the no-arbitrage price of a 160-day forward contract on the index.
FP = 1,260 × e(0.054 − 0.035) × (160 / 365) = 1,270.54
作者: JoeyDVivre 时间: 2012-4-3 11:37
A stock is currently priced at $110 and will pay a $2 dividend in 85 days and is expected to pay a $2.20 dividend in 176 days. The no arbitrage price of a six-month (182-day) forward contract when the effective annual interest rate is 8% is closest to:
In the formulation below, the present value of the dividends is subtracted from the spot price, and then the future value of this amount at the expiration date is calculated.
(110 – 2/1.0885/365 – 2.20/1.08176/365) 1.08182/365 = $110.06
Alternatively, the future value of the dividends could be subtracted from the future value of the stock price based on the risk-free rate over the contract term.
作者: JoeyDVivre 时间: 2012-4-3 11:37
Consider a 9-month forward contract on a 10-year 7% Treasury note just issued at par. The effective annual risk-free rate is 5% over the near term and the first coupon is to be paid in 182 days. The price of the forward is closest to:
The forward price is calculated as the bond price minus the present value of the coupon, times one plus the risk-free rate for the term of the forward.
(1,000 – 35/1.05182/365) 1.059/12 = $1,001.84
作者: JoeyDVivre 时间: 2012-4-3 11:38
The U.S. risk-free rate is 2.96%, the Japanese yen risk-free rate is 1.00%, and the spot exchange rate between the United States and Japan is $0.00757 per yen. Both rates are continuously compounded. The price of a 180-day forward contract on the yen and the value of the forward position 90 days into the contract when the spot rate is $0.00797 are closest to:
| Forward Price | Value After 90 Days |
The no-arbitrage price of the 180-day forward contract is:
FT = $0.00757 × e(0.0296 − 0.0100) × (180 / 365) = $0.00764
The value of the contract in 90 days with 180 – 90 = 90 days remaining is:
作者: kmf229 时间: 2012-4-3 11:40
30 days ago, J. Klein took a short position in a $10 million 90-day forward rate agreement (FRA) based on the 90-day London Interbank Offered Rate (LIBOR) and priced at 5%. The current LIBOR curve is: - 30-day = 4.8%
- 60-day = 5.0%
- 90-day = 5.1%
- 120-day = 5.2%
- 150-day = 5.4%
The current value of the FRA, to the short, is closest to:
FRAs are entered in to hedge against interest rate risk. A person would buy a FRA anticipating an increase in interest rates. If interest rates increase more than the rate agreed upon in the FRA (5% in this case) then the long position is owed a payment from the short position.
Step 1: Find the forward 90-day LIBOR 60-days from now.
[(1 + 0.054(150 / 360)) / (1 + 0.05(60 / 360)) − 1](360 / 90) = 0.056198. Since projected interest rates at the end of the FRA have increased to approximately 5.6%, which is above the contracted rate of 5%, the short position currently owes the long position.
Step 2: Find the interest differential between a loan at the projected forward rate and a loan at the forward contract rate.
(0.056198 − 0.05) × (90 / 360) = 0.0015495 × 10,000,000 = $15,495
Step 3: Find the present value of this amount ‘payable’ 90 days after contract expiration (or 60 + 90 = 150 days from now) and note once again that the short (who must ‘deliver’ the loan at the forward contract rate) loses because the forward 90-day LIBOR of 5.6198% is greater than the contract rate of 5%.
[15,495 / (1 + 0.054(150 / 360))] = $15,154.03
This is the negative value to the short.
作者: kmf229 时间: 2012-4-3 11:40
What is the value of a 6.00% 1x4 (30 days x 120 days) forward rate agreement (FRA) with a principal amount of $2,000,000, 10 days after initiation if L10(110) is 6.15% and L10(20) is 6.05%?
The current 90-day forward rate at the settlement date, 20 days from now is:
([1+ (0.0615 x 110/360)]/[1+ (0.0605 x 20/360)] – 1) x 360/90 = 0.061517 The interest difference on a $2 million, 90-day loan made 20 days from now at the above rate compared to the FRA rate of 6.0% is:
[(0.061517 x 90/360) – (0.060 x 90/360)] x 2,000,000 = $758.50
Discount this amount at the current 110-day rate:
758.50/[1+ (0.0615 x 110/360)] = $745.76
作者: kmf229 时间: 2012-4-3 11:41
Monica Lewis, CFA, has been hired to review data on a series of forward contracts for a major client. The client has asked for an analysis of a contract with each of the following characteristics:- A forward contract on a U.S. Treasury bond
- A forward rate agreement (FRA)
- A forward contract on a currency
Information related to a forward contract on a U.S. Treasury bond: The Treasury bond carries a 6% coupon and has a current spot price of $1,071.77 (including accrued interest). A coupon has just been paid and the next coupon is expected in 183 days. The annual risk-free rate is 5%. The forward contract will mature in 195 days.
Information related to a forward rate agreement: The relevant contract is a 3 × 9 FRA. The current annualized 90-day money market rate is 3.5% and the 270-day rate is 4.5%. Based on the best available forecast, the 180-day rate at the expiration of the contract is expected to be 4.2%.
Information related to a forward contract on a currency: The risk-free rate in the U.S. is 5% and 4% in Switzerland. The current spot exchange rate is $0.8611 per Swiss France (SFr). The forward contract will mature in 200 days.Based on the information given, what initial price should Lewis recommend for a forward contract on the Treasury bond?
The forward price (FP) of a fixed income security is the future value of the spot price net of the present value of expected coupon payments during the life of the contract. In a formula:
FP = (S0 − PVC) × (1 + Rf)T
A 6% coupon translates into semiannual payments of $30. With a risk-free rate of 5% and 183 days until the next coupon we can find the present value of the coupon payments from:
PVC = $30 / (1.05)183/365 = $29.28.
With 195 days to maturity the forward price is:
FP = ($1,071.77 – $29.28) × (1.05)195 / 365 = $1,070.02.
(Study Session 16, LOS 54.c)
Suppose that the price of the forward contract for the Treasury bond was negotiated off-market and the initial value of the contract was positive as a result. Which party makes a payment and when is the payment made? A)
| The long pays the short at the initiation of the contract. |
|
B)
| The short pays the long at the maturity of the contract. |
|
C)
| The long pays the short at the maturity of the contract. |
|
If the value of a forward contract is positive at initiation then the long pays the short the value of the contract at the time it is entered into. If the value of the contract is negative initially then the short pays the long the absolute value of the contract at the time the contract is entered into. (Study Session 16, LOS 54.a)
Suppose that instead of a forward contract on the Treasury bond, a similar futures contract was being considered. Which one of the following alternatives correctly gives the preference that an investor would have between a forward and a futures contract on the Treasury bond? A)
| The futures contract will be preferred to the forward contract. |
|
B)
| It is impossible to say for certain because it depends on the correlation between the underlying asset and interest rates. |
|
C)
| The forward contract will be preferred to the futures contract. |
|
The forward contract will be preferred to a similar futures contract precisely because there is a negative correlation between bond prices and interest rates. Fixed income values fall when interest rates rise. Borrowing costs are higher when funds are needed to meet margin requirements. Similarly reinvestment rates are lower when funds are generated by the mark to market of the futures contract. Consequently the mark to market feature of the futures contract will not be preferred by a typical investor. (Study Session 16, LOS 54.a)
Based on the information given, what initial price should Lewis recommend for the 3 × 9 FRA?
The price of an FRA is expressed as a forward interest rate. A 3 × 9 FRA is a 180-day loan, 90 days from now. The current annualized 90-day money market rate is 3.5% and the 270-day rate is 4.5%. The actual (unannualized) rates on the 90-day loan (R90) and the 270-day loan (R270) are:
R90 = 0.035 × (90 / 360) = 0.00875
R270 = 0.045 × (270 / 360) = 0.03375The actual forward rate on a loan with a term of 180 days to be made 90 days from now (written as FR (90, 180)) is:
Annualized = 0.02478 × (360 / 180) = 0.04957 or 4.96%.
(Study Session 16, LOS 54.c)
Based on the information given and assuming a notional principal of $10 million, what value should Lewis place on the 3 × 9 FRA at time of settlement? A)
| $37,218 paid from long to short. |
|
B)
| $38,000 paid from short to long. |
|
C)
| $19,000 paid from long to short. |
|
The value of the FRA at maturity is paid in cash. If interest rates increase then the party with the long position will receive a payment from the party with a short position. If interest rates decline the reverse will be true. The annualized 180-day loan rate is 4.96%. Given that annualized interest rates for a 180-day loan 90 days later are expected to drop to 4.2%, a cash payment will be made from the party with the long position to the party with the short position. The payment is given by:
The present value of the FRA at settlement is:
38,000 / {1 + [0.042 × (180 / 360)]} = 38,000 / 1.021 = $37,218
(Study Session 16, LOS 54.c)
Based on the information given, what initial price should Lewis recommend for a forward contract on Swiss Francs based on a discrete time calculation?
The value of a forward currency contract is given by:
Where F and S are quoted in domestic currency per unit of foreign currency. Substituting:
(Study Session 16, LOS 54.c)
作者: kmf229 时间: 2012-4-3 11:42
Calculate the price (expressed as an annualized rate) of a 1x4 forward rate agreement (FRA) if the current 30-day rate is 5% and the 120-day rate is 7%.
A 1x4 FRA is a 90-day loan, 30 days from today.
The actual rate on the 30-day loan is: R30 = 0.05 x 30/360 = 0.004167
The actual rate on the 120-day loan is: R120 = 0.07 x 120/360 = 0.02333
FR (30,90) = [(1+ R120)/(1+ R30)] – 1 = (1.023333/1.004167) – 1 = 0.0190871
The annualized 90-day rate = 0.0190871 x 360/90 = .07634 = 7.63%
作者: kmf229 时间: 2012-4-3 11:42
Consider a forward contract on 1 million Mexican Pesos at $0.08254/MXN. 60 days prior to expiration the U.S. risk-free rate is 5%, the Mexican risk-free rate is 6%, and the spot rate is $0.08211/MXN. The value of the contract to the long is closest to:
The formula is:
Vt = St / (1 + Rfor)(T − t) − FT / (1 + Rdom)(T − t) .
The value is 0.08211 / 1.0660/365 − 0.08254/1.0560/365 = 0.08132763 − 0.08188065 = -0.00055302.
The answer is in USD/ Peso, because when multiplying by Pesos, the answer is in USD.
0.00055302 × 1 million Pesos = -$553.02.
作者: kmf229 时间: 2012-4-3 11:44
Chantal DuPont is the CFO of Vetements Verdun, a manufacturer of specialty clothing and uniforms, located in northern France. The firm is currently undergoing an expansion which will require DuPont to draw down 25 million on Vetements Verdun’s credit line as a 90-day bridge loan before the mortgage closes. The money will not be needed for 60 days, at which point the interest rate will be determined. The interest rate on the loan will be based off 90-day LIBOR.DuPont is becoming concerned because of signs that interest rates may begin to rise. The firm cannot afford to have its borrowing costs increase significantly over current rates. In response to DuPont’s concerns, the company’s CEO, Viviane Lamarre, has asked DuPont to hedge the firm’s borrowing costs, even if that entails some near-term outlays. DuPont and Lamarre discuss entering into a forward rate agreement (FRA) to hedge Vetements Verdun’s interest rate exposure on the credit line. Current LIBOR rates are: Libor rate |
30-day | 2.6% |
60-day | 2.8% |
90-day | 3.0% |
120-day | 3.2% |
150-day | 3.3% |
180-day | 3.4% |
They decide to go forward with the hedge and DuPont enters into the appropriate FRA for the full amount of 25 million. In the first 30 days of the FRA, the fixed income markets rally sharply. The new set of LIBOR rates, on the thirtieth day of the FRA, is: Libor rate |
30-day | 2.2% |
60-day | 2.4% |
90-day | 3.6% |
120-day | 3.8% |
150-day | 3.8% |
180-day | 3.8% |
At the settlement date, the interest savings on the loan term is 23,750. DuPont tells Lamarre, “I am looking forward to cashing our settlement check for 23,750.” Lamarre adds, “Yes, and on top of that we get to borrow for 90 days at a below-market rate.” Both DuPont and Lamarre are pleased with their decision to hedge. Which statement most accurately describes a 2 x 3 forward rate agreement? A)
| Underlying loan of two month maturity under a contract that expires in three months. |
|
B)
| Contract expires in two months on an underlying loan settled in three months. |
|
C)
| Two-month underlying interest rate on a contract settled in three months. |
|
A 2 x 3 forward rate agreement is a contract that expires in two months and the underlying loan is settled in three months. The underlying rate is a 30-day (1-month) rate on a 30-day (1-month) loan in 60 days (2 months). (Study Session 16, LOS 54.a)
Which forward rate agreement would most effectively hedge Vetements Verdun’s exposure to LIBOR?
Vetements Verdun needs to be hedged against 90-day LIBOR rates that will prevail 60 days from now. Such a hedge would require a two-month contract on three-month rates, to be settled in five months: a 2 x 5. (Study Session 16, LOS 54.c)
Which value is closest to the price of the most effective hedge for Vetements Verdun?
The actual, unannualized rate on the 60-day loan is:
R60 = 0.028 × 60/360 = 0.00467
The actual, unannualized rate on the 150-day loan is:
R150 = 0.033 × 150/360 = 0.01375
So the rate on a 90-day loan to be made 60 days from now is:
FR (60,90) = ((1 + R150)/(1 + R60)) − 1
FR (60,90) = (1.01375/1.00467) − 1
FR (60,90) = 1.00904 − 1
FR (60,90) = 0.904%
We annualize this rate using the formula:
0.904% × (360/90) = 3.62%(Study Session 16, LOS 54.c)
What must the 90-day LIBOR rate have been at the expiration of the contract?
Since Vetements Verdun is long the FRA, the market rate of interest at settlement must be higher than the price of the contract and the 23,750 has a positive value. The interest savings at the end of the loan term will be:
Interest savings = ( (market rate × (90/360)) − (0.0362 × (90/360)) ) × 25,000,000
23,750 = ((market rate × 90/360) − 0.00905) × 25,000,000
0.000950 = market rate × 90/360 − 0.00905
0.0100 = market rate × 0.25
0.0400 = market rate
The market rate must have been 4.0%.(Study Session 16, LOS 54.c)
Regarding the statements made by Lamarre and DuPont about the ultimate value of their hedge: A)
| Lamarre’s statement is correct; DuPont’s statement is incorrect. |
|
B)
| Lamarre’s statement is incorrect; DuPont’s statement is incorrect. |
|
C)
| Lamarre’s statement is incorrect; DuPont’s statement is correct. |
|
The interest savings at the end of the loan term must be discounted back to the present value on the FRA settlement date:
Settlement payment = Present value of interest savings
Settlement payment = 23,750 / (1 + (0.040 × 90/360))
Settlement payment = 23,750 / (1 + 0.010)
Settlement payment = 23,750 / 1.010
Settlement payment = 23,515
The settlement check would be for 23,515. DuPont’s statement is incorrect. Lamarre’s statement is also incorrect because the settlement check represents the value of the below-market loan. The actual loan will be at the prevailing rate, and the settlement on the FRA will offset the interest cost on the loan.(Study Session 16, LOS 54.c)
Thirty days into the FRA, what is the value of the contract from Vetements Verdun’s perspective?
Since we have moved 30 days into the FRA, the new rate for the end of the contract is the 30-day rate (60 days originally minus 30 days passed) and the new rate for the settlement of the loan is the 120-day rate (150 days originally minus 30 days passed).
With that information, the pricing is straightforward:
The actual, unannualized rate on the 30-day loan is:
R30 = 0.022 × 30/360 = 0.00183
The actual, unannualized rate on the 120-day loan is:
R120 = 0.038 × 120/360 = 0.01267
The rate on a 90-day loan to be made 30 days from now is:
FR (30,90) = ((1 + R120) / (1 + R30)) − 1
FR (30,90) = ((1 + 0.01267) / (1 + 0.00183)) − 1
FR (30,90) = (1.01267 / 1.00183) − 1
FR (30,90) = 1.010820 − 1
FR (30,90) = 1.0820%
We annualize this rate using the formula:
1.082% × (360/90) = 4.33%
The interest saving is:
Interest saving = ( (0.0433 × 90/360) − (0.0362 × 90/360) ) × 25,000,000
Interest saving = (0.01083 − 0.00905) × 25,000,000
Interest saving = 0.00178 × 25,000,000
Interest saving = 44,500
The interest “saving” is a positive 44,500. Discounting that back at the current 120-day rate we have:
FRA value = 44,500 / (1 + ( 0.038 × 120/360) )
FRA value = 44,500 / (1 + ( 0.012667) )
FRA value = 44,500 / 1.012667
FRA value = 43,943
The value of the FRA to Vetements Verdun 30 days into the contract is 43,943. In other words, they are due 43,943. (Study Session 16, LOS 54.c)
作者: kmf229 时间: 2012-4-3 11:44
The best measure of the amount of credit risk exposure for a forward contract, at a point in time, is the: A)
| liabilities of the counterparty. |
|
B)
| value of the contract. |
|
C)
| notional amount of the contract. |
|
The amount of credit risk is best measured by the contract value at a point in time. This is the present value of the settlement payment, based on current market prices, interest rates, or exchange rates. The party to whom the payment would be made has the credit risk, the risk that the payment will not be made or that the asset will not be delivered/purchased at contract expiration.
作者: kmf229 时间: 2012-4-3 11:45
The credit risk in a forward contract is: A)
| positively related to the term of the contract. |
|
B)
| only an issue for the long. |
|
C)
| directly related to the contract value. |
|
The credit risk to the party with the position with the positive value (long or short) is greater, the greater the value of the forward contract at a point in time. A contract with a longer term may have a lower contract value.
作者: kmf229 时间: 2012-4-3 11:45
Over the life of a forward contract, the amount of credit risk is least likely to:
The amount of credit risk is least likely to stay the same. The amount of credit risk is based on the contract value, which is zero at contract initiation. For the value to stay the same (at zero), the expected future price of the asset must not change over the life of the contract, an unlikely circumstance. As the value of the contract to the long goes from positive to negative, the amount of credit risk changes in sign.
作者: kmf229 时间: 2012-4-3 11:45
Credit risk to the long (position) in a forward contract will increase over the life of the contract due to all of the following EXCEPT the: A)
| short party has deteriorating finances. |
|
B)
| settlement date is getting closer. |
|
C)
| contract value to the short is negative and decreasing. |
|
Deteriorating finances of the counterparty increase the probability of default. The amount owed to the long increases as the value of the underlying asset increases, which is the same as an increase in the value of the contract. An increase in the amount ‘owed’ and an increase in the probability of default can both be viewed as increasing credit risk. By itself, the passage of time does not necessarily increase credit risk.
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