Derivatives Exam 2 UPDATED Exam
Questions and CORRECT Answers
When a ________ price changes, the gain or loss (in value, "on paper" only) is the present value
of the change in the ________ price multiplied by the size of the position. - CORRECT
ANSWER - Value of a Forward Contract
When a ________ price changes, the gain or loss is the change in the futures price multiplied by
the size of the position. - CORRECT ANSWER - Value of a Futures Contract
futures;
Therefore, you do not need to take the present value like you do on a forward contract which
does not actually get settled until maturity (when profits/losses are actually realized). -
CORRECT ANSWER - The gain or loss on the ________ contract is realized right away
because the contracts are settled daily/marked to market.
same - CORRECT ANSWER - When the short term risk-free interest rate is constant, the
forward price for a contract with a certain delivery date is (in theory) ___________ (higher,
lower, same?) as the futures price for a contract with that delivery date.
different - CORRECT ANSWER - when short term interest rates vary unpredictably like
in the real world, forward prices and futures prices are ________ (same, different)
slightly higher - CORRECT ANSWER - When the price of the underlying asset is strongly
positively correlated with interest rates, futures prices will tend to be _____________ than
forward prices.
slightly lower - CORRECT ANSWER - When the price of the underlying asset is strongly
negatively correlated with interest rates, futures prices will tend to be _______________ than
forward prices.
, number of USD per unit of the foreign currency - CORRECT ANSWER - Future
exchange rates are quoted as
spot exchange rates - GBP, EUR, AUD, and NZD are USD per unit of foreign currency (like the
futures). But other currencies (e.g., CAD and JPY) are quoted as units of the foreign currency per
USD (unlike futures) - CORRECT ANSWER - Forward exchange rates are quoted in the
same way as
futures market (not all like the forward market) for pricing of forwards/futures - US investors
perspective - CORRECT ANSWER - we define our spot and forward exchange rate like
they would be defined in the
borrow 1000 USD (or how much ever) @ r for T, convert to x = 1000/market quote for Foreign
Rate (ex. AUD), and invest x AUD @ rf. Simultaneously enter into T year forward contract @
market quoted exchange rate to sell at y = xe^rf(T) AUD for y * market quoted rate USD in T
years. You owe 1000e^.01xT, which you pay off with the y*market quoted rate you get from
forward contract in exchange for the y AUD. Thus, riskless profit of y*market quoted rate -
1000e^.01xT. - CORRECT ANSWER - If market quotes forward exchange rate higher
than calculated value, arbitrage opportunity is...
the spot commodity rather than the forward/futures - CORRECT ANSWER -
Consumption commodities are used or consumed, therefore there can be extra benefits to holding
"balance the equation" for consumption commodities and reflects the benefits of owning the
physical spot underlying commodity - CORRECT ANSWER - y is the convenience yield
which is used to
with no storage costs and no income, such as a stock with no dividends (since the cost of carry is
just the financing rate) - CORRECT ANSWER - c = r for asset
that pays income at a rate q on the asset - CORRECT ANSWER - c = r - q for asset
for a currency - CORRECT ANSWER - c = r - rf
Questions and CORRECT Answers
When a ________ price changes, the gain or loss (in value, "on paper" only) is the present value
of the change in the ________ price multiplied by the size of the position. - CORRECT
ANSWER - Value of a Forward Contract
When a ________ price changes, the gain or loss is the change in the futures price multiplied by
the size of the position. - CORRECT ANSWER - Value of a Futures Contract
futures;
Therefore, you do not need to take the present value like you do on a forward contract which
does not actually get settled until maturity (when profits/losses are actually realized). -
CORRECT ANSWER - The gain or loss on the ________ contract is realized right away
because the contracts are settled daily/marked to market.
same - CORRECT ANSWER - When the short term risk-free interest rate is constant, the
forward price for a contract with a certain delivery date is (in theory) ___________ (higher,
lower, same?) as the futures price for a contract with that delivery date.
different - CORRECT ANSWER - when short term interest rates vary unpredictably like
in the real world, forward prices and futures prices are ________ (same, different)
slightly higher - CORRECT ANSWER - When the price of the underlying asset is strongly
positively correlated with interest rates, futures prices will tend to be _____________ than
forward prices.
slightly lower - CORRECT ANSWER - When the price of the underlying asset is strongly
negatively correlated with interest rates, futures prices will tend to be _______________ than
forward prices.
, number of USD per unit of the foreign currency - CORRECT ANSWER - Future
exchange rates are quoted as
spot exchange rates - GBP, EUR, AUD, and NZD are USD per unit of foreign currency (like the
futures). But other currencies (e.g., CAD and JPY) are quoted as units of the foreign currency per
USD (unlike futures) - CORRECT ANSWER - Forward exchange rates are quoted in the
same way as
futures market (not all like the forward market) for pricing of forwards/futures - US investors
perspective - CORRECT ANSWER - we define our spot and forward exchange rate like
they would be defined in the
borrow 1000 USD (or how much ever) @ r for T, convert to x = 1000/market quote for Foreign
Rate (ex. AUD), and invest x AUD @ rf. Simultaneously enter into T year forward contract @
market quoted exchange rate to sell at y = xe^rf(T) AUD for y * market quoted rate USD in T
years. You owe 1000e^.01xT, which you pay off with the y*market quoted rate you get from
forward contract in exchange for the y AUD. Thus, riskless profit of y*market quoted rate -
1000e^.01xT. - CORRECT ANSWER - If market quotes forward exchange rate higher
than calculated value, arbitrage opportunity is...
the spot commodity rather than the forward/futures - CORRECT ANSWER -
Consumption commodities are used or consumed, therefore there can be extra benefits to holding
"balance the equation" for consumption commodities and reflects the benefits of owning the
physical spot underlying commodity - CORRECT ANSWER - y is the convenience yield
which is used to
with no storage costs and no income, such as a stock with no dividends (since the cost of carry is
just the financing rate) - CORRECT ANSWER - c = r for asset
that pays income at a rate q on the asset - CORRECT ANSWER - c = r - q for asset
for a currency - CORRECT ANSWER - c = r - rf
