PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Chapter 26, Problem 2PS
Summary Introduction
To discuss: The given statements are true or false.
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Students have asked these similar questions
Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract?
a. Forward contracts can be tailored, while future contracts are non-standardized.
b. Forward contracts are classified as exotic derivatives.
c. Futures contracts are exchange-traded contracts, daily settlements are implemented by the clearing house.
d. More flexibility as the buyer can decide whether or not to exercise the contract at maturity.
e. For futures contracts, all cash flows are required to be paid at one time on contract maturity.
3. Why is the initial value of a futures contract zero?
a. impossible to tell
b. the futures is immediately marked-to-market
c. you do not pay anything for it
d. the basis will converge to zero
e. the expected profit is zero
This question is about futures risk premia. Consider a two period economy.You can buy stocksin period 0, and then sell them in period 1. You can also enter into futures contracts in period 0, whichexpire in period 1.
Since buying single-stock futures appears to be a fairly profitable trade, you decide toinvest in a futures strategy. You enter a long futures contract position. You also invest cash in period 0 at the risk-free rate, so you have just enough topay for the futures contract at expiration. You plan to sell the stock just after expiration. What is theexpected return on this trading strategy (in terms of expected period-1 dollars you get, per period-0dollar invested)?
Chapter 26 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 26 - Vocabulary check Define the following terms: a....Ch. 26 - Prob. 2PSCh. 26 - Prob. 3PSCh. 26 - Futures prices Calculate the value of a six-month...Ch. 26 - Prob. 5PSCh. 26 - Prob. 6PSCh. 26 - Prob. 7PSCh. 26 - Prob. 8PSCh. 26 - Prob. 9PSCh. 26 - Prob. 10PS
Ch. 26 - Hedging You own a 1 million portfolio of aerospace...Ch. 26 - Prob. 12PSCh. 26 - Prob. 13PSCh. 26 - Catastrophe bonds On some catastrophe bonds,...Ch. 26 - Futures contracts List some of the commodity...Ch. 26 - Prob. 16PSCh. 26 - Prob. 17PSCh. 26 - Prob. 18PSCh. 26 - Prob. 20PSCh. 26 - Prob. 21PSCh. 26 - Prob. 22PSCh. 26 - Hedging What is meant by delta () in the context...Ch. 26 - Futures and options A gold-mining firm is...Ch. 26 - Prob. 25PSCh. 26 - Hedging Price changes of two gold-mining stocks...Ch. 26 - Risk management Petrochemical Parfum (PP) is...Ch. 26 - Total return swaps Is a total return swap on a...Ch. 26 - Prob. 30PSCh. 26 - Prob. 31PSCh. 26 - Prob. 32PSCh. 26 - You are a vice president of Rensselaer Advisers...
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Similar questions
- At time t = 0, a trader takes a long position in a futures contract on stock i that willexpire at time T. the present value of this contract to the long is given by: See Image.Assume no-arbitrage pricing. Show analytically that if the return from stock i is positively correlated with the overall return on the stock market, then the futures market must be in backwardation at time t = 0.arrow_forwardAt time t = 0, a trader takes a long position in a futures contract on stock i that willexpire at time T. the present value of this contract to the long is given by: See Image. Assume no-arbitrage price, briefly descthat if the return from stock i is positively correlated with the overall return on the stock market, then the futures market must be in backwardation at time t = 0.arrow_forwardConsider the following two scenarios whereby the cost-of-carry model is violated. You are required to select appropriate missing words and fill in question 1. a. long b. spot c. over priced d. short arbitrage e. under priced f. long arbitrage g. futures h. short Question 1 a. If ft >S0 (1 + rf - d)^t, then the( ) is ( )relative to ( ) or equivalently, the quoted futures price is higher than what it should be. Thus, the correct arbitrage strategy should be: ( ) the futures contract and ( )the spot market. This strategy is also known as ( ). b. If ft <S0 (1 + rf - d)^t, then the( ) is ( )relative to ( ) or equivalently, the quoted futures price is lower than what it should be. Thus, the correct arbitrage strategy should be: ( ) the futures contract and ( )the spot market. This strategy is also known as ( ).arrow_forward
- The basis is defined as the spot price minus the futures price. A trader is hedging the sale of an asset with a short futures position. The basis falls unexpectedly. Which of the following is true? Question 3Answer a. The hedger’s position sometimes worsens and sometimes improves. b. The hedger’s position stays the same. c. The hedger’s position worsens. d. The hedger’s position improves.arrow_forwardUsers of commodities are: Answer a. Usually not participants in futures contracts. b. Speculators preferring to get the large returns that result from large risk. c. Buyers of futures d. Likely to take the short position in a futures contract.arrow_forwardDetermine which of the following is NOT a distinguishing characteristic of futures contracts, relative to forward contracts. Question * A. Contracts are settled daily, and marked-to-market. B. Contracts are more liquid, as one can offset an obligation by taking the opposite position. C. Contracts are more customized to suit the buyer’s needs. D. Contracts are structured to minimize the effects of credit risk. E. Contracts have price limits, beyond which trading may be temporarily halted.arrow_forward
- The basis is defined as the spot price minus the futures price. A trader is hedging the sale of an asset with a short futures position. The basis falls unexpectedly. Which of the following is TRUE? a. The hedger’s position worsens. b. The hedger’s position improves. c. The hedger’s position stays the same. d. The hedger’s position sometimes worsens and sometimes improves.arrow_forwardwhich one is correct please confirm? Q20: The main advantage of using options on futures contracts rather than the futures contracts themselves is tha interest rate risk is controlled while preserving the possibility of gains. "interest rate risk is controlled, while removing the possibility of losses" "interest rate risk is not controlled, but the possibility of gains is preserved." "interest rate risk is not controlled, but the possibility of gains is lost."arrow_forwardOrganized exchanges offer important advantages like (a) mitigating credit risk and (b) providing liquidity. But they have the following market imperfections: 1. Open interest in futures contracts declines for longer maturities; so, for liquidity reasons, you may be unable to hedge longer deliveries using longer maturity futures contracts. Explain briefly how you would overcome these market imperfections.arrow_forward
- Which of the following is true? A.Forward contract buyers and sellers do not know who the counterparty is B.Future contracts are marked to market daily. C.Forward contracts have no default risk. D.Futures contracts involve high default riskarrow_forwardA one-year gold futures contract is selling for $1,247. Spot gold prices are $1,200 and the one-year risk-free rate is 2%. a) According to spot-futures parity, what should be the futures price? b) What risk-free strategy can investors use to take advantage of the futures mispricing, and what would be the profits from that strategy?arrow_forwarda) define the following, and discuss the difference between them at origination, before expiration, and at expiration. ◦forward price and the value of a forward contract ◦futures price and the value of a futures contract b) discuss the assumptions under which futures and forward prices can be considered the same. c) describe how to incorporate discrete and continuous dividends into futures contracts on stocks and stock indices. d) explain and discuss the use of interest rate parity in pricing foreign currency forwards and futures. e) describe how spot prices are determined using the cost-of-carry model.arrow_forward
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