Skip to content

IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Financial instruments and insurance contracts as cashflow models

An investor in India enters a long forward contract to buy 100 shares of a company at a delivery price of Rs 500 per share, to be settled in one year. At maturity the market price is Rs 540 per share. Ignoring costs, what is the investor's payoff at maturity?

The long forward holder gains Rs 4,000. Each share is bought for Rs 500 and is worth Rs 540, giving Rs 40 per share, and for 100 shares the total payoff is Rs 4,000. A loss of that size would be the seller's position.

  1. ARs 4,000 gainCorrect
  2. BRs 4,000 loss
  3. CRs 54,000 gain
  4. DRs 40 gain
  5. Rs 50,000 loss

Explanation

The long party pays 500 and receives a share worth 540, so the gain per share is 40. For 100 shares the payoff is 40 x 100 = Rs 4,000. The Rs 4,000 loss option reverses the sign, which would be the short party's result.

Did you get it right without looking?

One question tells you little. A timed set on Financial instruments and insurance contracts as cashflow models shows your real accuracy, how long you take and where you lose marks.

Practise Financial instruments and insurance contracts as cashflow modelsFree diagnostic mock

More Financial instruments and insurance contracts as cashflow models questions