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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.

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3. List the factors that could cause futures prices to deviate from forward prices. How important are these factors in general?

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?

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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.

(a) If the term structure is 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. Get Finance Help Today

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