Question

The value of a forward contract is always equal to $0.

True

False

When one agrees on a forward contract, the buyer pays the forward price to the seller today.

True

False

When 3-month LIBOR is expected to rise, Eurodollar futures price will decrease.

True

False

To protect against future short-term interest rate decrease, a bank should long Eurodollar futures today.

True

False

Answer 1

1. False-The value of a forward contract is always equal to $0.

In initial phase, the forward contract value is zero, and then it becomes positive or negative throughout the life-cycle of the contract. The forward price agreed at the initiation in the contract having zero value and thus no arbitrage opportunities.

2. True -When one agrees on a forward contract, the buyer pays the forward price to the seller today.

Forward contracts are the agreements made by the both the buyer and seller,of an underlying security on a future date, at an agreed price.

3. True-When 3-month LIBOR is expected to rise, Eurodollar futures price will decrease.

The 3 Month LIBOR stands for London Interbank Offered Rate which is the interest rate set for banks to be able to borrow from each other for 3 months. Eurodollar futures prices are expressed numerically using 100 minus the implied 3-month U.S. dollar LIBOR interest rate.

4. True- To protect against future short-term interest rate decrease, a bank should long Eurodollar futures today.