Question #43
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 18
Status: Unattempted
Correct Answer: A
Question
The theoretical price of a forward contract:
Answer Choices:
A. equals the long’s expectation of the future price of the underlying asset
B. is the no-arbitrage price
C. is always greater than the current price of the underlying asset
Explanation
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.
(Module 30.1, LOS 30.b)
Typesetting math: 100%