An Introduction To Derivative Securities 1st Edition By Robert A. Jarrow – Test Bank

CHAPTER 11: The Cost-of-Carry Model

MULTIPLE CHOICE

1. 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.

ANS: C DIF: Easy REF: 11.2 TOP: A Cost-of-Carry Example
MSC: Applied

2. 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.

ANS: D DIF: Easy REF: 11.2 TOP: A Cost-of-Carry Example
MSC: Applied

3. 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.

ANS: C DIF: Moderate REF: 11.2 TOP: A Cost-of-Carry Example
MSC: Applied

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.

4. 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.

ANS: C DIF: Easy REF: 11.2 TOP: A Cost-of-Carry Example
MSC: Applied

5. 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.

ANS: B DIF: Moderate REF: 11.2 TOP: A Cost-of-Carry Example
MSC: Applied

6. 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

ANS: D DIF: Easy REF: 11.3 TOP: The Assumptions
MSC: Factual

7. 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

ANS: E DIF: Easy REF: 11.3 TOP: The Assumptions
MSC: Factual

8. 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.

ANS: B DIF: Moderate REF: 11.4 TOP: The Cost-of-Carry Model
MSC: Applied

9. 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.

ANS: B DIF: Difficult REF: 11.4 TOP: The Cost-of-Carry Model
MSC: Conceptual

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.

ANS: A DIF: Moderate REF: 11.5
TOP: Valuing a Forward Contract at Intermediate Dates MSC: Applied