1.
Let´s suppose that the current price of a Stock is 100. The forward price for delivery of this stock in 1 year is 110. Assume further that the stock pays no dividends and the annual effective risk-free interest rate is 10%. For each of the following statements state if it is TRUE or FALSE and explain why.
The time-1 profit diagram and the time-1 payoff diagram for long positions in this forward contract are identical.
The time-1 profit for a long position in this forward contract is exactly opposite to the time-1 profit for the corresponding short forward position.
There is no comparative advantage to investing in the stock versus investing in the forward contract.
If the 10% interest rate was continuously compounded instead of annual effective, then it would be more beneficial to invest in the stock, rather than the forward contract.
If there was a dividend of 3.00 paid 6 months from now, then it would be more beneficial to invest in the stock, rather than the forward contract.
2.
Two parties enter an agreement to borrow $15 million in 90 days for a period of 180 days at 2.5% interest. Which of the following choices describes the time frame of this FRA? Justify the answer.
1.The settlement date is in 90 days, and the interest period is 180 days
2.The settlement date is in 90 days, and the contract expires in 180 days
3.The settlement date is in 90 days, and there will be reinitiation of the contract every 90 days for 180 days (2 settlements)