Question 7 (a) What is the basic difference between a forward contract and a futures contract? How important is this difference in determining the contract prices? [2 marks] (b) Is the "forward price the same thing as the "value of the forward contract" Explain. I [2 marks] (c) A forward contract exists for a unit of two-year government securities with delivery to take place three years from now. Suppose the price of these securities three years from now is uniformly distributed from a low $800 to a high of $1,400. The one-year expected riskless rate of interest is 5 percent for all periods under consideration. (i) If investors are risk neutral, what should be the current forward price? [2 marks] (ii) Suppose now that investors are risk averse and that the forward price is $1,200. What do you know about the relationship between the market value of two-year government securities and overall consumption? [2 marks] (iii) Continue to assume (as in (ii)) that the current forward price (at time 0) is $1,200. One year from now (at time 1) the forward price for the same item and same delivery date is $1,000. Determine the time 1 value (to the buyer) of the contract that was agreed upon at time 0. [2 marks] [Total for Question 7 = 10 marks] Question 7 (a) What is the basic difference between a forward contract and a futures contract? How important is this difference in determining the contract prices? [2 marks] (b) Is the "forward price the same thing as the "value of the forward contract" Explain. I [2 marks] (c) A forward contract exists for a unit of two-year government securities with delivery to take place three years from now. Suppose the price of these securities three years from now is uniformly distributed from a low $800 to a high of $1,400. The one-year expected riskless rate of interest is 5 percent for all periods under consideration. (i) If investors are risk neutral, what should be the current forward price? [2 marks] (ii) Suppose now that investors are risk averse and that the forward price is $1,200. What do you know about the relationship between the market value of two-year government securities and overall consumption? [2 marks] (iii) Continue to assume (as in (ii)) that the current forward price (at time 0) is $1,200. One year from now (at time 1) the forward price for the same item and same delivery date is $1,000. Determine the time 1 value (to the buyer) of the contract that was agreed upon at time 0. [2 marks] [Total for Question 7 = 10 marks]