Forward Pricing by Replication Depends on the Following Assumption

question 5

Multiple Choice

Forward pricing by replication depends on the following assumption:

• A) That the nominal interest rate for the cost of carry is positive.
• B) That long positions are easier to take in the forward contract than in the spot asset.
• C) That the underlying is a traded asset which is storable.
• D) That the spot asset is not a financial security.

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Definitions:

Efficiency

Efficiency refers to the optimal use of resources to achieve a desired output with minimal waste or expense, often analyzed in economic, energy, and operational contexts.

Profit Maximization

The process or strategy of adjusting production and operational variables to achieve the highest possible return or profit.

Variable Costs

These vary with output. When output rises, variable costs rise; when output declines, variable costs fall.

Break-Even Points

The production level or point in sales at which total revenues equal total expenses, resulting in neither profit nor loss.