You hold a forward contract to take delivery of U.S. 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 term structure of interest rates shifts down, the yield on Treasury bonds also decreases. As a result, the price of the T-bonds increases. Since the forward contract specifies a fixed price for the bonds, the value of the contract will increase as the price of the underlying asset (bonds) increases. Therefore, the value of the forward contract will have risen on the date of delivery.

You Hold a Forward Contract to Take Delivery of U