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OFOD7 e Test Bank CH 05

The document contains a test bank with various finance-related questions focusing on concepts such as short selling, forward pricing, exchange rates, and convenience yield. Each question requires calculations or selections based on provided data and scenarios. The test bank is designed to assess understanding of financial instruments and market behavior.

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D Ho
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78 views2 pages

OFOD7 e Test Bank CH 05

The document contains a test bank with various finance-related questions focusing on concepts such as short selling, forward pricing, exchange rates, and convenience yield. Each question requires calculations or selections based on provided data and scenarios. The test bank is designed to assess understanding of financial instruments and market behavior.

Uploaded by

D Ho
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd

CHAPTER 5

Test Bank

1. An investor shorts 100 shares when the share price is $50 and closes out the position six months later
when the share price is $43. The shares pay a dividend of $3 per share during the six months. What is
the investor's profit or loss? ………….

2. The spot price of an investment asset that provides no income is $30 and the risk-free rate for all
maturities (with continuous compounding) is 10%. What is the three-year forward price? ………

3. Repeat question 2 on the assumption that the asset provides an income of $2 at the end of the first
year and at the end of the second year………..

4. In question 2 what is the value of a three-year forward contract with a delivery price of $30? ………..

5. An exchange rate is 0.7000 and the six-month domestic and foreign risk-free interest rates are 5% and
7% (both expressed with continuous compounding). What is the six-month forward rate? …………

6. A short forward contract that was negotiated some time ago will expire in three months and has a
delivery price of $40. The current forward price for three-month forward contract is $42. The three
month risk-free interest rate (with continuous compounding) is 8%. What is the value of the short
forward contract? ……….

7. The spot price of an asset is positively correlated with the market. Which of the following would you
expect to be true (circle one)

(a) The forward price equals the expected future spot price.

(b) The forward price is greater than the expected future spot price.

(c) The forward price is less than the expected future spot price.
(d) The forward price is sometimes greater and sometimes less than the expected future spot price.

8. The one-year Canadian dollar forward exchange rate is quoted as 1.4000. What is the corresponding
futures quote? ………………

9. Which of the following is a consumption asset (circle one)

(a) The S&P 500 index

(b) The Canadian dollar

(c) Copper

(d) IBM shares

10. Which of the following is true (circle one)

(a) The convenience yield is always positive or zero.

(b) The convenience yield is always positive for an investment asset.

(c) The convenience yield is always negative for a consumption asset.

(d) The convenience yield measures the average return earned by holding futures contracts.

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