Forward contract and its pricing

A forward contract is:

• a contract that involves a long postion only.

• a contract that involves short position only.

• an agreement between a bank and the Fed.

• an agreement by two parties to engage in a financial transaction at a future point in time.

Which of the following are not characteristics of an interest-rate forward contract?

• Specification of the place of the transaction.

• Specification of the amount of the debt instrument.

• Specification of the price (interest rate) on the debt instrument.

• Specification of the actual debt instrument.

To say that the forward market lacks liquidity means that

• forward contracts usually result in losses.

• forward contracts cannot be turned into cash.

• it may be difficult to make the transaction.

• forward contracts cannot be sold for cash.

A disadvantage of a forward contract is that

• it may be difficult to locate a counterparty.

• the forward market suffers from lack of liquidity.

• these contracts have default risk.

• all of the above.

Forward contracts are risky because they

• are subject to lack of liquidity

• are subject to default risk.

• hedge a portfolio.

• both (a) and (b) are true.

The advantage of forward contracts over future contracts is that they

• are standardized.

• have lower default risk.

• are more liquid.

• none of the above.

Forward contracts are of limited usefulness to financial institutions because

• of default risk.

• it is impossible to hedge risk.

• of lack of liquidity.

• both (a) and (c) of the above.

Future differs from forwards because they are

• used to hedge portfolio

• Used to hedge individual securities

• used in both financial and foreign exams market

• a standardized contract

Entering into a forward contract will

• increase the risk involved in a transaction.

• lower the borrower's cost of capital.

• benefit the borrower because the interest rate will be lower.

• raise the borrower's cost of capital.

The main trade off between forward and future contracts is

• Design flexibility.

• Credit risk.

• Liquidity risk.

• All of the above.