1.1. Futures contracts pay out daily because they are marked-to-market, while forward con- tracts only pay out at the end. Therefore, futures prices are always higher as you don't need to discount the cash flows. (A) True. (B) False. 1.2. The correct interest rate to use in our formulas for forward prices is: (A) Your own cost of capital. (B) The risk-free rate. (C) Depends on the underlying asset. If the asset is risk-free, use the risk-free rate. If the asset is risky, use a rate with risk compensation. 1.3. If the underlying investment asset of a forward contract becomes more costly to store, all other things equal we would expect the forward price to (A) Rise. You are compensating the storage costs. (B) Stay the same. Storage is irrelevant as you were only ever trading (C) Fall. You are saving on storage costs. 1.4. When interest rates are low but the yield curve is upward sloping, then the cheapest to deliver bonds for Treasury futures tend to be: (A) Long-maturity, low-coupon bonds. (B) Long-maturity, high-coupon bonds. (C) Short-maturity, low-coupon bonds. (D) Short-maturity, high-coupon bonds. (E) Uncertain. The two pieces of information lead to different answers. 1.5. Eurodollar futures rates tend to be lower than the corresponding forward rates. (A) True. (B) False