Suppose S0 = 150, forward F0(T) = 153.04, T = 0.5 years. What is the implied annual risk-free rate r assuming no incomes or costs and discrete compounding (F0(T) = S0(1 + r)^T)?
Explanation
Implied risk-free rate is obtained by solving F0(T) = S0(1 + r)^T for r; here r is about 4% annualized.
Other questions
Which definition best describes a derivative instrument?
Which of the following is an example of an equity underlying for derivatives?
Which statement most accurately contrasts OTC and exchange-traded derivative markets?
Which derivative type is a contingent claim rather than a firm commitment?
An investor pays a premium of USD6 for a call option with strike USD45. At expiration the underlying trades at USD50. What is the buyer's profit per option?
Which of the following best describes initial margin for a futures contract?
A long forward contract buyer has a payoff at maturity equal to which expression?
Which event describes a convenience yield for a commodity owner?
Which hedge accounting designation is most appropriate for a swap that converts a floating-rate loan into a fixed-rate liability for an issuer?
A trader buys a futures contract at f0 and posts initial margin. If the futures settlement price increases on day 1, what happens to the trader's margin account?
Which of the following positions benefits from a decline in the underlying price?
How is a credit default swap (CDS) protection buyer exposed if the underlying issuer's CDS spread widens before a credit event?
Which of the following best explains basis risk for a hedger?
An investor sells a covered call by holding the underlying stock and selling a call with strike 5% above the current spot. Under what outcome does the strategy produce higher return compared with simply holding the stock and selling it today, assuming the stock at expiry is unchanged?
At inception a forward contract has value zero. Why is this true ignoring transaction costs and credit concerns?
If S0 = 100 and the risk-free rate r = 4% annually with T = 0.5 years and no income or storage costs, what is the fair forward price F0(T) under discrete compounding?
A stock pays a known cash dividend D at time t1 before forward maturity T. How does this dividend affect the forward price at inception?
Which of the following is true about mark-to-market of futures versus forwards?
If an asset's forward price is observed above the arbitrage-free value implied by spot and the risk-free rate, what arbitrage trade should a rational investor do immediately (ignoring costs)?
An FX forward formula includes e^{(r_f − r_d)T}. What does (r_f − r_d) represent?
Which of the following best summarizes the payoff of a long European put option at expiry?
Which of the following is a primary operational advantage of trading futures instead of underlying cash commodities?
Which of the following best represents the general forward price formula when the underlying yields a continuous dividend yield i and has a storage cost c, under continuous compounding?
Which of the following is a correct description of central counterparty (CCP) clearing for OTC trades between dealers?
Which of the following illustrates replication of a long forward on a non-dividend-paying stock with maturity T?
An investor buys a six-month call on an index with strike X and pays premium c0. At expiry the index is below X. Which is true about the call buyer's net profit?
A forward contract seller at time t has value Vt(T) = F0(T)(1 + r)^{-(T−t)} − St. If the risk-free rate r increases unexpectedly with other terms fixed, what happens to the seller's Vt(T)?
Which of the following is true about option sellers versus option buyers regarding counterparty credit risk immediately after trade execution?
Which of the following best describes an embedded derivative?
An investor holds a forward contract priced so that F0(T) = S0 e^{rT}. If r becomes negative, how does that affect the forward price relative to spot, all else equal?
How does central clearing (novation to a CCP) change bilateral counterparty exposures for two dealers entering a swap?
What is the payoff profile type for firm commitments such as forwards and futures relative to contingent claims?
Which of the following is a systemic risk concern related to central clearing?
An investor wants to hedge a 75-day foreign currency receivable in KRW. Which derivative and market type is typically most suitable to precisely match the timing and amount?
Which statement best characterizes the difference between pricing and valuation of forwards?
Which of the following best explains why exchange-traded futures often have lower transaction costs than comparable OTC forwards?
A firm has floating-rate debt and enters a receive-floating/pay-fixed interest rate swap. What economic exposure has the firm effectively created after the swap?
Which is the primary reason corporate issuers prefer OTC derivatives for hedging commercial transactions?
Which factor most directly increases the forward price of a commodity, all else equal?
An investor buys a CDS protection on a corporate issuer without owning the underlying bond. What is the investor's economic exposure?
Which of these is an example of price discovery function provided by derivative markets?
A one-year zero-coupon government bond with face 100 sells for 96.15. What is the one-year zero rate z1 under annual compounding?
What is an implied forward rate (for interest rates)?
Which of the following best describes a forward rate agreement (FRA)?
Which of the following would most directly increase an option's premium ceteris paribus?
Which participant typically acts as a market maker in derivatives markets and often nets offsetting trades with other dealers in the OTC market?
An investor buys a six-month futures contract on gold at 1792.13 and posts initial margin 4950. Over the life of the contract, futures price declines so the investor faces margin calls. Which risk is primarily realized if the investor cannot meet a margin call?
Which of the following statements about structured notes that embed options is most accurate?
Which of the following best describes the primary use of implied volatility extracted from option prices?