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Quantitative Finance

Futures and Forwards

Challenge Quizzes

Futures and Forwards: Level 1-2 Challenges

Futures and Forwards: Level 1-2 Challenges

The blue curve in the above plot shows the interest rate for short-term loans set by the United States Federal Reserve Bank. As you can see, the rate has a long term downward trend, and has been near zero since 2009. The gray curves show projections for the future value of the short-term rate from the forward curve. What can we say about the forward projections vs the actual short-term interest rate set by the Fed?

The forward curve usually underestimates the rise in short-term interest rates The forward curve is equally likely to over- or underestimate the short term interest rate. The forward curve usually overestimates the rise in short-term interest rates

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by Josh Silverman

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How does the price of a future change as volatility of the underlying increases?

Increases. Since it is riskier, the risk is priced in. Increases. Since it is riskier, fewer people want to sell it. Decreases. Since it is riskier, fewer people want to buy it. Decreases. Since it is riskier, the risk is priced in. Stays constant. Volatility has no effect.

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by Calvin Lin

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If the oil future is in contango, which of the following activities are we most likely to observe?

Image credit: Wikipedia Suicip

Oil fracking will increase Gas / Petrol prices will rise Offshore drilling will increase More offshore oil tankers will be rented Oil spot price will increase

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by Calvin Lin

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A publicly traded firm is in desperate need of money. However, due to it's credit rating, it is unable to obtain loans from the market.

Which of the following trades is the best for it to do?

Short sell delta -99 puts and stock Buy delta 99 calls and sell stock Short sell other companies' stock to the market Sell its own stock to the market

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by Calvin Lin

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You buy a May Gold Forward contract from a Lehman Brothers trader. What happens when Lehman collapsed?

Nothing. Your contract is with the exchange. The SEC will guarantee your contract The bankruptcy court will decide a suitable settlement Your futures contract is invalidated You sell it back for $0 because they are bankrupt.

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by Calvin Lin

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