Forward pricing by replication depends on the following assumption:
A)That the nominal interest rate for the cost of carry is positive.
B)That long positions are easier to take in the forward contract than in the spot asset.
C)That the underlying is a traded asset which is storable.
D)That the spot asset is not a financial security.

Question

Quizplus · Accepted Answer

Forward pricing by replication relies on the storable nature of the underlying asset, as this enables market participants to take long positions in the asset in the spot market and hold it until maturity of the forward contract. This assumption is necessary for replication to be possible, as it involves purchasing the underlying asset, financing the purchase with borrowing, and hedging the risk through a short position in the forward contract. The other options are not directly relevant to the assumptions underlying forward pricing by replication.

Forward Pricing by Replication Depends on the Following Assumption