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:

Initial Interview

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