Deck 11: The Cost of Carry Model

Question 1

Suppose that the value of a forward contract that you were holding for the last six months is $50 today.It matures in three more months.If today's spot price is $97 and the underlying simple interest rate is 5 percent per year,what was the forward price negotiated when you purchased the contract six months back?

A) $15.57
B) $38.76
C) $47.59
D) $50.63
E) None of these answers are correct.

Answer 1

C

Question 2

A forward contract that began earlier matures on May 15.The value of the contract is $3,the spot is $100,a zero-coupon bond maturing on May 15 is worth $0.98,and the forward price is $100.The arbitrage profit that you can make today by trading one forward contract and other securities would be:

A) 0
B) $1
C) $1.50
D) $3.75
E) None of these answers are correct.

Answer 2

B

Question 3

Today's spot price of gold is $1,600 per ounce.The continuously compounded interest rate is 5 percent per year.The quoted six-month forward price for gold is $1,650.
The arbitrage-free six-month forward price for gold is:

A) $1,616.16
B) $1,630.00
C) $1,640.50
D) $1,648.03
E) None of these answers are correct.

Answer 3

C

Question 4

Today's spot price of gold is $1,600 per ounce.The continuously compounded interest rate is 5 percent per year.The quoted six-month forward price for gold is $1,650.
The arbitrage profit that you can make today by trading one forward contract and other securities is:

A) $5.08
B) $9.26
C) $8.07
D) $9.38
E) None of these answers are correct.

Question 5

The current price of BUG stock is $51.The continuously compounded interest rate is 5.25 percent per year.What is the five-month forward price for BUG stock?

A) $51.22
B) $51.89
C) $66.31
D) $52.13
E) None of these answers are correct.

Question 6

Today is January 1.The forward price for contracts maturing on April 1 is $103 and on October 1 is $108.On April 1,the price of a zero-coupon bond maturing on October 1 is $0.97.Assuming that the underlying interest rate is a continuously compounded interest rate,the amount of profit that you can make on October 1 by trading one contract each of the near and distant maturity forwards and other securities is:

A) $0.50
B) $0.81
C) $1.81
D) $2.98
E) None of these answers are correct.

Question 7

Today is January 1.The forward price for a gold forward maturing on April 1 is $1,560 per ounce.The continuously compounded interest rate is 6 percent per year.Then the forward price for a forward contract on gold maturing on July 1 is:

A) $1,529.56
B) $1,541.08
C) $1,569.24
D) $1,583.58
E) None of these answers are correct.

Question 8

If the assumption of "no market frictions" holds,then which of the following is INCORRECT?

A) no transactions costs
B) no margin requirements
C) no short sales restrictions
D) no taxes
E) no credit risk

Question 9

Suppose that trades now require a transactions cost of $3 per ounce whenever spot gold is traded,a $2 per ounce one-time fee for trading forward contracts,but no charges for trading bonds.If you have to pay transactions costs,the arbitrage profit that you can make today by trading one forward contract and other securities is:

A) 0
B) $4.26
C) $2.53
D) $7.53
E) None of these answers are correct.

Question 10

Suppose you bought a forward on January 1 that matures a year later.The forward price was $214 at that time and the simple interest rate was 7 percent per year.Six months have passed,and the spot price is now $190.The value of your forward contract today is:

A) -$16.76
B) -$3.56
C) 0
D) $16.76
E) None of these answers are correct.

Question 11

Consider two portfolios,A and B.We consider their values today and on some future date,time T.There are no cash flows on intermediate dates.If arbitrage opportunities are ruled out,then which of the following statements is INCORRECT?

A) If the portfolios A and B always have the same value at time T,then they must have the same value today.
B) If the portfolios A and B have the same value today,then they must always have the same value at time T.
C) If we subtract portfolio A from B,and the resulting portfolio always has a zero value at time T,then it must have a zero value today.
D) If we subtract portfolio A from B,and the resulting portfolio always has a positive value at time T,then it has a positive value today.
E) If we subtract portfolio A from B,and the resulting portfolio has a zero value today,then it need not have a zero value at time T.

Question 12

The current price of YBM stock is $103.The seven-month forward price for YBM stock is $106.If the forward price is determined according to a simple cost-of-carry model,then the continuously compounded interest rate is:

A) 3.23 percent per year
B) 2.87 percent per year
C) 4.92 percent per year
D) 5.25 percent per year
E) None of these answers are correct.

Question 13

Suppose that today's price of gold in the spot market is $1,510 per ounce.The price of a zero-coupon bond maturing in six months is $0.98.Then the six-month forward price for gold is:

A) $1,515.08
B) $1,531.61
C) $1,540.82
D) $1,550.69
E) None of these answers are correct.

Question 14

The assumptions underlying the cost-of-carry model do NOT include the following:

A) no market frictions
B) no credit risk
C) competitive and well-functioning markets
D) constant interest rates
E) no arbitrage opportunities

Question 15

Suppose that you trade a forward contract today that matures after one year.The forward price is $105 and the simple interest rate is 7 percent per year.If after six months from today,the spot price is going to be $125 and the value of the forward contract is $20,the arbitrage profit that you can make today by trading one forward contract and other securities is:

A) 0
B) $1.56
C) $2.96
D) $3.55
E) None of these answers are correct.