A Forward Contract Is Similar to an Option Contract Because

question 25

Multiple Choice

A forward contract is similar to an option contract because they both

• A) can provide insurance against the price of the underlying stock.
• B) are paid for up front in the form of premiums.
• C) are paid for at the end of the contract in the form of premiums.
• D) require a future settlement payment.
• E) trade on exchanges.

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Definitions:

Net Present Value (NPV)

The difference between an investment’s market value and its cost.

After-Tax Borrowing Rate

The interest rate on borrowed funds after accounting for the effect of income taxes.

Cost of Capital

The rate of return that a company must earn on its investment projects to maintain its market value and attract funds.

Financial Lease

A lease agreement where the lessee effectively obtains all the risks and rewards of ownership without actually owning the asset.