Question #23 - Reading 30 Pricing and Valuation of Forward Commitments

Reading: Reading 30 Pricing and Valuation of Forward Commitments

PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf

Page: 11

Status: Unattempted

Shared Context

- Champion and Silvers each gave a reason for why the futures price of the S&P 500 index might be less than the spot price. With respect to their statements, it is most accurate to conclude that: A) neither statement is valid. B) Champion's statement is invalid while Silver's statement is valid. C) both statements are valid.

Question

For a futures contract on an asset with no storage costs, convenience yield, or other expected cash flows over the term of the contract, there should be a:

Answer Choices:

A. positive correlation between the futures price and interest rates and a negative correlation between the futures price and the spot price

B. negative correlation between the futures price and interest rates and a positive correlation between the futures price and the spot price

C. positive correlation between the futures price and both interest rates and the spot price

Explanation

Typesetting math: 100% The equation for the no-arbitrage price of a futures contract with no storage costs, convenience yield, or other expected cash flows over the term of the contract is FP = S0 × (1 + R)T, so the futures price is positively correlated with both the interest rate and the spot price.

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