Exam 8: Principles of Pricing Forwards,futures and Options on Futures

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

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

The risk-free rate is missing from d₁ in the Black model because it is effectively zero.

The value of a long position in a forward contract at expiration is

The dividends that are subtracted from the cost of storage to determine the cost of carry are actually the present value of future dividends.

In financial futures markets,contango means that long-term interest rates are less than short-term interest rates.

A normal market in which the futures price exceeds the spot price is described as a contango.

If one buys an asset,sells a futures,and holds the position until expiration,it is equivalent to selling the asset at the original futures price.

Find the value of a European put option on futures if the futures price is 72,the exercise price is 70,the continuously compounded risk-free rate is 8.5 percent,the volatility is 0.38 and the time to expiration is three months.

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?

If the U.S.government announced that it would allow the dollar to drop in foreign currency markets,the price of a euro put would probably fall.

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?

A synthetic put option on futures could be constructed by buying a call option on futures and selling the futures.

A futures contract can have negative value.

If the U.S.risk-free rate is 4 percent and the Swiss risk-free rate is 5 percent,a U.S.investor can earn the Swiss rate by buying Swiss francs,selling a forward or futures contract and converting back to dollars at the contract's expiration.

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

The cost of carry consists of all the following except

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

Determine the value of a European foreign currency put if the call is at $0.05,the spot rate is $0.5702,the exercise price is $0.59,the domestic interest rate is 5.75 percent,the foreign interest rate is 4.95 percent and the options expire in 45 days.(The interest rates are continuously compounded. )