A Futures Price Is Currently 40 Cents

question 16

Multiple Choice

A futures price is currently 40 cents.It is expected to move up to 44 cents or down to 34 cents in the next six months.The risk-free interest rate is 6%.What is the probability of an up movement in a risk-neutral world?

• A) 0.4
• B) 0.5
• C) 0.72
• D) 0.6

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Definitions:

Reserve Requirement

The lowest sum of money that a bank is required to keep as reserves against the deposits it holds, as mandated by the central bank.

Federal Funds Rate

The interest rate at which banks lend reserves to each other overnight, a key tool of monetary policy used by the Federal Reserve to influence the economy.

Buying Bonds

The act of purchasing debt securities issued by governments or corporations, which pay interest over a fixed period.

Money Supply

The aggregate sum of funds present in an economy at a given moment, encompassing cash, bank deposits, and various readily accessible assets.