The Spot Price of the Market Index Is $900

question 19

Multiple Choice

The spot price of the market index is $900.A 3-month forward contract on this index is priced at $930.The market index rises to $920 by the expiration date.The annual rate of interest on treasuries is 2.4% (0.2% per month) .What is the difference in the payoffs between a long index investment and a long forward contract investment? (Assume monthly compounding.)

• A) $10.84
• B) $24.59
• C) $26.40
• D) $43.20

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Definitions:

Average-Cost Method

An inventory costing method where the cost of goods sold and ending inventory are calculated using the average cost of all units available for sale during the period.

Merchandise Inventory

Goods and products held by a business for the purpose of resale to customers, forming a key current asset on the balance sheet.

FOB Shipping Point

Freight terms indicating that the seller places goods free on board the carrier, and the buyer pays the freight costs.

Freight Costs

The expenses associated with transporting goods from one location to another.