Exam 9: Principles of Pricing Forwards, Futures, and Options on Futures

What is the lower bound of a European foreign currency call if the spot rate is $2.25,the domestic interest rate is 5.5 percent,the foreign interest rate is 6.2 percent,the option expires in three months,and the exercise price is $2.20?

Futures prices differ from spot prices by which one of the following factors?

Holding everything else constant,dividends or interest on the underlying commodity would make a futures price be higher.

Which of the following can explain a contango?

A deep in-the-money call option on futures is exercised early because

The cost of carry futures pricing model requires that investors be able to sell short the commodity.

Why is the initial value of a futures contract zero?

Find the lower bound of a European foreign currency put if the spot rate is $3.50,the domestic interest rate is 8 percent,the foreign interest rate is 7 percent,the option expires in six months,and the exercise price is $3.75.

Determine the appropriate price of a European put on a futures if the call is worth $6.55,the risk-free rate is 5.6 percent,the futures price is $80,the exercise price is $75,and the expiration is in three months.

The daily settlement brings the value of a futures contract back to zero.

The cost of carry includes the interest lost on the funds tied up in the asset stored.

The Black-Scholes-Merton formula can be used in place of the Black formula if you use the futures price for the stock price and a risk-free rate of zero.

A transaction that exploits differences in the theoretical and actual values of a foreign currency forward or futures contract is called

Suppose you buy a futures contract at $150.If the futures price changes to $147,what is its value an instant before it is marked-to-market?

Suppose it is currently July.The September futures price is $60 and the December futures price is $68.What does the spread of $8 represent?

A market in which the futures price is said to be unbiased is also a market in which there is a risk premium.

Suppose you buy a one-year forward contract at $65.At expiration,the spot price is $73.The risk-free rate is 10 percent.What is the value of the contract at expiration?

Suppose there is a risk premium of $0.50.The spot price is $20 and the futures price is $22.What is the expected spot price at expiration?

If the exercise price equals the futures price,a put on the futures will have the same price as a call on the futures.

Interest-rate parity is a cost-of-carry model.