Identify the false statement related to break forward contracts.
A)It is a combination of spot and derivative positions that replicates an ordinary call option.
B)The initial positions are structured so that the overall position costs nothing up front.
C)Penalizes the investor if the option ends up out-of-the-money.
D)Break denotes the ability of the purchaser to void the contract.
E)All of the above statements are true related to break forward contracts.

Question

Quizplus · Accepted Answer

Break forward contracts do not provide the purchaser with the ability to void the contract. Instead, they typically involve a commitment to buy or sell an asset at a specified price, with certain conditions attached. The term "break" refers to the price level at which the payoff structure of the contract changes, not the ability to void the contract.

Identify the False Statement Related to Break Forward Contracts