Investments, 11th Edition (exclude Access Card)
11th Edition
ISBN: 9781260201543
Author: Zvi Bodie Professor; Alex Kane; Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Question
Chapter 22, Problem 3PS
Summary Introduction
To evaluate: The difference between earning cash flow through short-selling an asset and by entering a short futures position.
Introduction:
Delivery in short sale: Delivery in short sale refers to a situation where a purchase of share is done of day 1; the shares will be received 2 days afterward. Similarly, when there is a sale of a share, it has to be delivered 2 days after the transaction. In short, funds can be withdrawn on the settlement day and not on the transaction day.
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Students have asked these similar questions
Why 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?
What is the spread (i.e., difference) between futures price and spot price called?
a) Convergence
b) Basis risk
c) Market risk
d) Credit risk
What is the correct way to determine the value of a long forward position at expiration?
The value is the price of the underlying ...
... multiplied by the forward price.
... divided by the forward price.
... plus the forward price.
... minus the forward price
please need type answer not an image
Chapter 22 Solutions
Investments, 11th Edition (exclude Access Card)
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Similar questions
- Which of the following is NOT an external method of interest rate risk management? * A. Using an interest rate swap B. Using financial futures C. Using an off-balance-sheet strategy, such as a forward rate agreement D. Having fixed-interest assets financed by fixed-interest liabilities and equityarrow_forwardWhat is the purpose of initial and maintenance margins? How does marking to market affect the amount of funds held in the futures investor's margin account?arrow_forwardWhat are the differences between stocks and bonds in terms of predicted future payments? Which sort of investment is regarded to be riskier (stocks or bonds)? Given your knowledge, which investment (stocks or bonds) do you believe is often referred to as "fixed income"?arrow_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_forwardChanges in what price lead to gains and/or losses in futures contracts?arrow_forwardFrom a credit risk perspective, why will a futures contract be less exposed as compared to a forwardcontract and why not?arrow_forward
- Explain what a first-to-default credit default swap is. Does its value increase or decrease as the default correlation between the companies in the basket increases? Explain.arrow_forwardWhich of the following is not needed to compute the present value of an investment?a. The length of time between the investment and future receiptb. The interest ratec. The rate of inflationd. The amount of the receipTarrow_forwardWhat is the Relationship between Changes in Interest Rates, Investor Returns, and “Going-In”Cap Ratesarrow_forward
- Question: Market Value 1. What kinds of liabilities are there in the market to be purchased?arrow_forwardWhat is the relationship between forward rates and the market’s expectation of future short rates? Explain in the context of both the expectations hypothesis and the liquidity preference theory of the term structure of interest rates.arrow_forwardHow is the value of a financial option affected by(a) the current price of the underlying asset, (b) theexercise (or strike) price, (c) the risk-free rate,(d) the time until expiration (or maturity), and(e) the variance of returns on the asset?arrow_forward
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