A one-year forward contract is an agreement where: A. One side has the obligation to buy an asset for a certain price at some time during the next year. B. One side has the obligation to buy an asset for the market price in one year’s time. C. One side has the obligation to buy an asset for a certain price in one year’s time. D. One side has the right to buy an asset for a certain price in one year’s time.
Question
A one-year forward contract is an agreement where:
A. One side has the obligation to buy an asset for a certain price at some time during the next year.
B. One side has the obligation to buy an asset for the market price in one year’s time.
C. One side has the obligation to buy an asset for a certain price in one year’s time.
D. One side has the right to buy an asset for a certain price in one year’s time.
Solution
The correct answer is:
C. One side has the obligation to buy an asset for a certain price in one year’s time.
Here's the reasoning behind this choice:
A forward contract is a type of derivative financial instrument that obligates the buyer to purchase, and the seller to sell, an asset at a predetermined price and time in the future.
In the context of a one-year forward contract:
A. This is incorrect because a forward contract specifies a certain price and a certain future date, not a range of dates.
B. This is incorrect because the price in a forward contract is agreed upon at the start of the contract, not determined by the market price at the time of delivery.
C. This is correct. In a one-year forward contract, one party has the obligation to buy (and the other party has the obligation to sell) an asset at a predetermined price in one year's time.
D. This is incorrect because a forward contract involves an obligation, not a right. The right to buy an asset at a certain price in the future would be a call option, not a forward contract.
Similar Questions
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