When the Forward Price Is Less Than the Expected Future

question 11

Multiple Choice

When the forward price is less than the expected future spot price,we say that the:

• A) market is in backwardation
• B) market is in contango
• C) market is in normal backwardation
• D) net hedging hypothesis is in effect
• E) None of these answers are correct.

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Definitions:

Financial Intermediary

An institution that pools investors’ money and invests it on their behalf giving the investors shares of itself. Mutual funds are the primary example.

Indirect Method

A way of calculating cash flows from operations by starting with net income and adjusting for changes in non-cash accounts.

Investment Banks

Financial institutions that assist individuals, corporations, and governments in raising capital, advising on mergers and acquisitions, and providing other financial services.

Certificate of Deposit

A savings certificate with a fixed maturity date, specified fixed interest rate, and can be issued in any denomination aside from minimum investment requirements.