Derivatives-I

bhuyanpk
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Derivatives-I

Postby bhuyanpk » Sun Sep 20, 2015 5:19 pm

If the net cost of carry of an asset is positive, then the price of a forward contract on that asset is most likely:
A.lower than if the net cost of carry was zero.
B.the same as if the net cost of carry was zero.
C.higher than if the net cost of carry was zero.


According to equation [S0+PV0(cost)-PV0(Benefit)] (1+rf)^t=F0T

answer should be C.Whereas it is given A.Pls explain

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edupristine
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Re: Derivatives-I

Postby edupristine » Wed Oct 07, 2015 1:11 pm

Can you tell the source of this question?

edupristine
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Re: Derivatives-I

Postby edupristine » Tue Nov 03, 2015 11:38 am

Net cost of carry = PV(Benefits) - PV(Cost)

If Net cost of carry is greater than 0, then PV(Benefits) is greater than PV(Cost)

In that case, F = {S0 * (1 + r)^T - [PV(Benefits) - PV(Cost)] * (1 + r)^T} is greater than (S0 * (1 + r)^T)

The right-hand side of the inequality is the forward price of the asset assuming net cost of carry is equal to 0.


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