CFA Practice Question

There are 206 practice questions for this study session.

CFA Practice Question

Assume the risk-free rate is 5%. The current price of gold is $300 per ounce and the forward price of gold is $315 in one year's time. You have $300. If you want to replicate a long gold position, you would ______.
A. deposit the money in the bank at 5% and long a forward contract
B. deposit the money in the bank at 5% and short a forward contract
C. buy the gold and short a forward contract
Explanation: One year later you will get $315 from your bank and then buy one ounce of gold at $315 (forward price).

User Contributed Comments 4

User Comment
jiba The example given in the textbook is wrong. No rational investor will never hold a stock priced at $102 today, and buy a forward contract to sell it at $100 one year from now. Why would the investor sell the stock now and deposit the $102 in the bank? In one year the investor would get $102 + risk-free interest.
Mhmdjamal is it possible to use this instrument to reach the answer?
Risky Assets+Derivatives=Risk Free Assets
xemex131 this is confusing, why can't i just buy gold in cash @300?
gkendall85 @xemex131 - You can, but the question is about synthetic replication. Remember this is a derivatives reading.
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