An Expiration Date Payoff and Profit Diagram for Forward Positions

question 82

Multiple Choice

An expiration date payoff and profit diagram for forward positions illustrates

• A) Gains and losses are usually small
• B) The payoffs to both long and short positions in the forward contract are asymmetrical around the contract price
• C) Forward contracts are zero-sum games
• D) Long positions benefit from falling prices
• E) None of the above

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Definitions:

Exchange Ratio

The rate at which one asset or security can be exchanged for another in a merger, acquisition, or other financial transactions.

Warrant

A security that grants the holder the right to buy a company's stock at a specific price before a certain date.

Convertible Debentures

A type of bond that can be converted into a predetermined number of shares of the issuing company’s stock at certain times during its life, usually at the discretion of the bondholder.

Conversion Value

The monetary value of a convertible security (such as a convertible bond) if it were converted into a predetermined number of shares of common stock, generally at the discretion of the holder.