"Derivative"exercise:Forward interest rate agreement
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Questions 1:
A forward rate agreement most likely differs from most other forward contracts because:
A 、positions cannot be closed out prior to maturity.
B、 it involves an option component.
C 、its underlying is not an asset.
Questions 2:
The pricing of forwards and futures will most likely differ if:
A、 interest rates exhibit zero volatility.
B 、futures prices and interest rates are negatively correlated.
C、 futures prices and interest rates are uncorrelated.
C is correct. Forward rate agreements, unlike most other forward contracts, do not have an asset as an underlying. Instead, the underlying is an interest rate.
A is incorrect. Forward rate agreements can also be closed out prior to maturity.
B is incorrect. Forward rate agreements do not involve an option component.
B is correct. The pricing of forwards and futures will differ if futures prices and interest rates are negatively correlated. A negative correlation between futures prices and interest rates makes forwards more desirable than futures in the long position.
A is incorrect. If interest rates exhibit zero volatility, the pricing of forwards and futures will be identical.
C is incorrect. If futures prices and interest rates are uncorrelated, the pricing of forwards and futures will be identical.
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