PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Question
Chapter 26, Problem 6PS
Summary Introduction
To discuss: The given statements are true or false.
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Which statement is true about the difference between futures and forward contracts? 1. If there are significant price fluctuations before the maturity date, futures contracts can lead to more unfavorable results compared to forward contracts. 2. None of them. 3. Futures contracts are settled at the end of the maturity, while forward contracts are settled daily. 4. Futures contracts are traded on the exchange, while forward contracts are traded on CCP. 5. Futures contracts have a fixed price, while forward contracts have a price determined at the 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
6. Which one of the following statements is incorrect regarding the margining of exchange-traded
futures contracts?
(a) If an investor fails to deposit variation margin in a timely manner, the positions may be
liquidated by the carrying broker.
(b) Initial margin is the amount of money that must be deposited when a futures contract is
opened.
(c) A margin call will be issued if the investor's margin account balance drops below the mainte-
nance level.
(d) A margin call will be issued only if the investor's margin account becomes negative
2
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Chapter 26 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 26 - Vocabulary check Define the following terms: a....Ch. 26 - Prob. 2PSCh. 26 - Catastrophe bonds On some catastrophe bonds,...Ch. 26 - Futures and options A gold-mining firm is...Ch. 26 - Prob. 5PSCh. 26 - Prob. 6PSCh. 26 - Futures contracts List some of the commodity...Ch. 26 - Prob. 8PSCh. 26 - Futures prices Calculate the value of a six-month...Ch. 26 - Futures prices In December 2017, six-month futures...
Ch. 26 - Prob. 11PSCh. 26 - Prob. 13PSCh. 26 - Prob. 15PSCh. 26 - Prob. 16PSCh. 26 - Prob. 17PSCh. 26 - Convenience yield In March 2018, six-month bitcoin...Ch. 26 - Prob. 19PSCh. 26 - Prob. 20PSCh. 26 - Total return swaps Is a total return swap on a...Ch. 26 - Prob. 22PSCh. 26 - Prob. 23PSCh. 26 - Hedging What is meant by delta () in the context...Ch. 26 - Hedging You own a 1 million portfolio of aerospace...Ch. 26 - Prob. 26PSCh. 26 - Prob. 27PSCh. 26 - Prob. 28PSCh. 26 - Hedging Price changes of two gold-mining stocks...Ch. 26 - Prob. 30PSCh. 26 - Prob. 31PSCh. 26 - Prob. 32PSCh. 26 - Prob. 33PSCh. 26 - You are a vice president of Rensselaer Advisers...
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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.arrow_forwardWhich of the following is NOT true O a. Futures contracts nearly always last longer than forward contracts O b. Delivery or final cash settlement usually takes place with forward contracts; the same is not true of futures contracts. O c. Futures contracts are standardized; forward contracts are not. O d. Forward contracts usually have one specified delivery date; futures contract often have a range of delivery dates.arrow_forwardA person who takes a short position in the futures market benefits from none of the answers are correct a rise in price of the underlying asset Oa fall in price of the underlying asset both a fall and rise of the underlying assetarrow_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_forwardAfter paying the initial margin, a futures investor does not have to pay any additional money until the investor's equity position falls below zero. True Falsearrow_forwardThe fact that the clearinghouse is the counterparty to every futures contract issued is important because it eliminates _________ risk. A. Market B. Basis C. Interest rate D. Creditarrow_forward
- Consider a security that pays income to its holders (e.g., a dividend-paying stock, or acoupon bond). Should the forward price of this security (for a contract that matures attime T), F0,T, be higher than, lower than, or equal to the security's current spot price?Why?.arrow_forwardIf spot price falls below the exercise price, seller of a futures contract makes a ______ while buyer makes a _________ in the derivative market. a)gain, loss b)loss, gain c)gain, gain d)loss, gainarrow_forwardWhy might individuals purchase futures contracts rather than the underlying asset? What is the difference in cash flow between short-selling an asset and entering a short futures position?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_forwardWhat are the key differences between future and forward contracts? a) direct contract for forwards b) clearing house for futures c) futures have less risk d) futures have a standard amountarrow_forwardThe 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_forward
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