Which of the following is TRUE in normal backwardation? Futures prices tend to: A) rise over the life of the contract because speculators are net long and have to receive compensation for bearing risk. B) fall over the life of the contract because hedgers are net short and have to receive compensation for bearing risk. C) fall over the life of the contract because speculators are net short and have to receive compensation for bearing risk. D) rise over the life of the contract because hedgers are net long and have to receive compensation for bearing risk.
C
C as in Charterholder.
A I like over D.
Banny isn’t normal backwardation when the Spot is greater than the expected spot rate? wouldn’t this mean the spot price will fall over time?
Isn’t normal backwardation when the expected spot rate is greater than the forward price?
i’m an idiot
yessir- it’s when the spot is greater than the expected futures px. it’s askin’ about futures prices though, not spot. to get to a happy place where spot = futures px at the end, i’d have to think spot would go down or futures up. asks futures here so i want to say it’d be rise. as for hedger/speculator- if you’re long the future, i’d think you’d be speculating, not hedging. i could be WAY off.
I like A Hedgers push price below to sell and the specs come in to buy. Over time the prices reverts.
I like A now as well. Thanks for the explanation ^^
is my logic right pinky? i hope so. i still can’t DO a swaps problem. seriously. i think i got 1 plain vanilla one right after studying for 2 hours yesterday on them… maybe if i put in a bit more time. for some reason, the whole math isn’t clicking perfectly. i have started drawing it out on a little timeline as suggested by others here and that’s helping. swaps are my nemisis- have put in a decent amount of time and it all hasn’t come together nicely yet. grr. i need to memorize futures formulas also. haven’t done that yet. derivs could be my undoing if i don’t put in another at least 10+ hrs of solid study time there. shoot me. if anyone has a remedial swap question to kind of get here’s the fixed side, here’s the floating…nothing crazy, just a pretty basic one, let’s work through one. i need some help.
I like A with Banni’s explanation
I agree with A, good question!
There answer is A. Here is one a tad easier. At expiration, the value of a forward contract is: A) always greater than or equal to zero. B) equal to the market price of the underlying asset. C) the difference between the contract price and the market value of the underlying asset. D) the difference between the buy price for the long and the sell price for the short.
Edit: meant to put C.
I like C
I’ve got 5 bucks on C
C is correct. Stay sharp. The writer of a receiver swaption has: A) the right to enter a swap in the future as the floating-rate payer. B) the right to enter a swap in the future as the fixed-rate payer. C) an obligation to enter a swap in the future as the fixed-rate payer. D) an obligation to enter a swap in the future as the floating-rate payer
C… whoops.
Another winner. I’ll say C on this one. If you buy the reciever swaption you have the option to receive the fixed rate. So selling it would mean you are obligated to pay the same.