Q1: Suppose that the spot price of the British pound is USD 1.7590, the forward price of a 90 day forward contract on the British pound is USD 1.7566 and a 90 day European put option on British pounds with an exercise price of USD 1.7966 is USD 0.03. An arbitrage would involve:

a.

Buying the 90-day forward and buying the 90-day European put.

b.

Short-selling the British pounds in the spot market and selling the 90-day forward.

c.

Buying the 90-day forward and writing the 90 day European put.

Q2: A stock is expected to pay a dividend of $1 per share in 2 months. An investor purchased a forward contract on the stock at a forward price of $50 some time ago. The contract now has 3 months to its delivery date. The stock is currently trading at $55 and the risk free rate is 4% on a continuously compounded basis. Consider the following statements.

I. The price of a forward contract on the stock with 3 months to the delivery date is $54.55

II. The value of the investor's forward position is $4.51

Which of the following is correct?

a.

Both statements are correct.

b.

Both statements are incorrect.

c.

Statement I is correct, Statement II is incorrect.

Q3: A trader who buys a 3 month forward contract on Euros at a forward price of 1.25 USD per Euro will make a profit if the spot price of the Euro on the delivery date is 1.35 USD per Euro.

Select one:

True

False