1. PSO and NRL stocks are currently priced at PKR 250 per share. Over the next year, PSO stock is expected to pay dividends whereas NRL stock is not expected to pay dividends. There are no carrying costs associated with holding either stock over the next year. Compared with PSO, the one-year forward price of NRL is most likely:

A. lower.
B. higher.
C. the same.

 

2. Rabia and Saman, two CFA candidates, make the following statements about an asset which neither pays interest nor divided. Also, there are no storage costs associated with the asset.

Rabia: Just before termination, the value of a forward contract on that asset is zero.
Saman: At initiation, the price of a forward contract on that asset is greater than the value of the contract. Which of the following is correct?

A. Only Rabia is correct.
B. Only Saman is correct.
C. Both Rabia and Saman are incorrect.

 

3. A portfolio manager is required to buy 25,000 shares of Biz Corp. in a month. She fears that the price will rise during the coming month, so she contacts a dealer and enters into an equity forward contract to buy 25,000 shares of Biz Corp. at $20 a share. When the contract expires, the price is $22 per share. At expiration who benefits and by how much?

A. Portfolio manager benefits by $50,000.
B. Dealer benefits by $500,000.
C. Dealer benefits by $50,000.

 

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