You hold a forward contract to take delivery of Treasury bonds in 9 months.If the entire term structure of interest rates shifts down over the 9-month period, the value of the forward contract will
Have _____ on the date of delivery.
A)risen
B)fallen
C)not changed
D)either risen or fallen, depending on the maturity of the T-bond
E)collapsed

Question

Quizplus · Accepted Answer

When the entire term structure of interest rates shifts down, it means that the interest rates have decreased. This results in an increase in the value of Treasury bonds. Since you hold a forward contract to take delivery of Treasury bonds, the value of the contract will rise on the date of delivery, as you can buy bonds at a lower price than market value. Thus, the answer is A) risen.

You Hold a Forward Contract to Take Delivery of Treasury