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68
The spot price of an asset is positively correlated with the market. Which of the following would you expect to be true?
A.The forward price equals the expected future spot price.
B.The forward price is greater than the expected future spot price.
C.The forward price is less than the expected future spot price.
D.The forward price is sometimes greater and sometimes less than the expected future spot price.
A.The forward price equals the expected future spot price.
B.The forward price is greater than the expected future spot price.
C.The forward price is less than the expected future spot price.
D.The forward price is sometimes greater and sometimes less than the expected future spot price.
Answer: C
When the spot price is positively correlated with the market the forward price is less than the expected future spot price. This is because the spot price is expected to provide a return greater than the risk-free rate and the forward price is the spot price grossed up at the risk-free rate.
When the spot price is positively correlated with the market the forward price is less than the expected future spot price. This is because the spot price is expected to provide a return greater than the risk-free rate and the forward price is the spot price grossed up at the risk-free rate.
Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015