What Should a Trader Do When the One-Year Forward Price

question 12

Multiple Choice

What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides no income.

• A) The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year.
• B) The trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the asset in one year.
• C) The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a short forward contract to sell the asset in one year
• D) The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a long forward contract to buy the asset in one year

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Definitions:

Safe Sex

Practices and behaviors that aim to reduce the risk of transmitting or acquiring sexually transmitted infections (STIs) and preventing unintended pregnancies.

Pregnancy Prevention

Strategies or methods used to avoid conception, including contraceptives and abstinence.

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The experience of physical or psychological enjoyment and satisfaction derived from sexual activities.

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The sexual stimulation of one's own genitals for sexual arousal or pleasure, usually to the point of orgasm.