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73
What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides no income.
A.The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year.
B.The trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the asset in one year.
C.The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a short forward contract to sell the asset in one year
D.The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a long forward contract to buy the asset in one year
A.The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year.
B.The trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the asset in one year.
C.The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a short forward contract to sell the asset in one year
D.The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a long forward contract to buy the asset in one year
Answer: D
If the forward price is too low relative to the spot price the trader should short the asset in the spot market and buy it in the forward market.
If the forward price is too low relative to the spot price the trader should short the asset in the spot market and buy it in the forward market.
Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015