Which of the following is TRUE about a short forward contract position? Select one alternative The short position is worth zero if the price of the asset declines after the contract has been entered into. The short position becomes more valuable as the price of the asset rises. The short position is worth zero if the price of the asset rises after the contract has been entered into. The short position becomes more valuable as the price of the asset declines.
Question
Which of the following is TRUE about a short forward contract position? Select one alternative The short position is worth zero if the price of the asset declines after the contract has been entered into. The short position becomes more valuable as the price of the asset rises. The short position is worth zero if the price of the asset rises after the contract has been entered into. The short position becomes more valuable as the price of the asset declines.
Solution
Step 1: Understand the concept of a short forward contract position. In a short forward contract, the holder agrees to sell an asset at a specified future date for a price agreed upon today.
Step 2: Analyze each statement in the context of a short forward contract.
Statement 1: The short position is worth zero if the price of the asset declines after the contract has been entered into. This is not necessarily true. If the price of the asset declines, the short position holder would benefit because they have agreed to sell the asset at a higher price than its current market value.
Statement 2: The short position becomes more valuable as the price of the asset rises. This is incorrect. If the price of the asset rises, the short position holder would be at a disadvantage because they have agreed to sell the asset at a lower price than its current market value.
Statement 3: The short position is worth zero if the price of the asset rises after the contract has been entered into. This is also incorrect. The value of the short position does not become zero if the price rises; instead, the short position holder would incur a loss.
Statement 4: The short position becomes more valuable as the price of the asset declines. This is correct. If the price of the asset declines, the short position holder would benefit because they have agreed to sell the asset at a higher price than its current market value.
So, the correct answer is: The short position becomes more valuable as the price of the asset declines.
Similar Questions
Which of the following is TRUE:Group of answer choicesNone of the above.A short position in a forward contract gives you the right and the obligation to buy an asset at a specified price, at a specified time in the future.Only the counterparty, which is short futures, is required to deposit money in a margin account.A long forward contract is equivalent to a long position in a put option and a short position in a call option.Buying an option to sell is the same as selling an option to buy.
Which of the following statements best describes changes in the value of a long forward position during its life?A.As interest rates go down, the value of the position goes upB.As the time to maturity goes down, the value of the position goes upC.As the price of the underlying goes up, the value of the position goes up
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What should a trader do when they believe the one-year forward price of an asset is lower than its intrinsic value? Assume that the asset provides no income. The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year.The trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the asset in one year. The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a short forward contract to sell the asset in one year. The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a long forward contract to buy the asset in one year.
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