Hull:Options,Futures,andOtherDerivatives,NinthEditionChapter5:DeterminationofForwardandFuturesPricesMultipleChoiceTestBank:QuestionswithAnswers1.Whichofthefollowingisaconsumptionasset?A.TheS&P500indexB.TheCanadiandollarC.CopperD.IBMstockAnswer:CA,B,andDareinvestmentassets(heldbyatleastsomeinvestorspurelyforinvestmentpurposes).Cisaconsumptionasset.2.Aninvestorshorts100shareswhenthesharepriceis$50andclosesoutthepositionsixmonthslaterwhenthesharepriceis$43.Thesharespayadividendof$3pershareduringthesixmonths.Howmuchdoestheinvestorgain?A.$1,000B.$400C.$700D.$300Answer:BTheinvestorgains$7persharebecauseheorshesellsat$50andbuysat$43.However,theinvestorhastopaythe$3persharedividend.Thenetprofitistherefore7−3or$4pershare.100sharesareinvolved.Thetotalgainistherefore$400.3.Thespotpriceofaninvestmentassetthatprovidesnoincomeis$30andtherisk-freerateforallmaturities(withcontinuouscompounding)is10%.Whatisthethree-yearforwardprice?A.$40.50B.$22.22C.$33.00D.$33.16Answer:AThe3-yearforwardpriceisthespotpricegrossedupfor3yearsattherisk-freerate.Itis30e0.1×3=$40.50.4.Thespotpriceofaninvestmentassetis$30andtherisk-freerateforallmaturitiesis10%withcontinuouscompounding.Theassetprovidesanincomeof$2attheendofthefirstyearandattheendofthesecondyear.Whatisthethree-yearforwardprice?A.$19.67B.$35.84C.$45.15D.$40.50Answer:BThepresentvalueoftheincomeis2e-0.1×1+2e-0.1×2=$3.447.Thethreeyearforwardpriceisobtainedbysubtractingthepresentvalueoftheincomefromthecurrentstockpriceandthengrossinguptheresultforthreeyearsattherisk-freerate.Itis(30−3.447)e0.1×3=$35.84.5.Anexchangerateis0.7000andthesix-monthdomesticandforeignrisk-freeinterestratesare5%and7%(bothexpressedwithcontinuouscompounding).Whatisthesix-monthforwardrate?A.0.7070B.0.7177C.0.7249D.0.6930Answer:DThesix-monthforwardrateis0.7000e−(0.05−0.07)×0.5=0.6930.6.Whichofthefollowingistrue?A.Theconvenienceyieldisalwayspositiveorzero.B.Theconvenienceyieldisalwayspositiveforaninvestmentasset.C.Theconvenienceyieldisalwaysnegativeforaconsumption...
