1.
Brie y explain the principles underlying the pricing of forward
contracts.
.
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2. True or false: The theoretical forward price decreases with
maturity. That is, for example, the theoretical price of a three-month forward
must be greater than the theoretical price of a six-month forward.
3. List the factors that could cause futures prices to deviate from
forward prices. How important are these factors in general?
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4.
The forward price of wheat for delivery in three months is $3.90
per bushel, while the spot price is $3.60. The three-month interest rate in
continuously compounded terms is 8% per annum. Is there an arbitrage
opportunity in this market if wheat may be stored costlessly?
5. A security is currently trading at $97. It will pay a coupon of $5
in two months. No other payouts are expected in the next six months.
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(a) If the term structure is at at 12%, what should the be forward
price on the security for delivery in six months?
(b)
If the actual forward price is $92, explain how an arbitrage may
be created.
