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Select all statements below that correctly distinguish currency forwards from currency futures:
Forwards are settled through clearinghouses.
Futures traded at the CME are resettled daily to mark the value of the contract to the market value.
Futures contracts are standardized in terms of currency amounts and expiration dates.
Forwards have limited liability. Futures have unlimited liability.
Forwards are customizable, over-the-counter (OTC) instruments.
Forward contracts can be negotiated for any expiration date. Futures contracts are always dated for the last Monday of each month.
Forward contracts do not have counterparty default risk.
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- Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract? a. Forward contracts can be tailored, while future contracts are non-standardized. b. Forward contracts are classified as exotic derivatives. c. Futures contracts are exchange-traded contracts, daily settlements are implemented by the clearing house. d. More flexibility as the buyer can decide whether or not to exercise the contract at maturity. e. For futures contracts, all cash flows are required to be paid at one time on contract maturity.By acting as the counterparty to every futures position, the exchange eliminates the A) market B) credit C) interest rate D) basis risk.a) define the following, and discuss the difference between them at origination, before expiration, and at expiration. ◦forward price and the value of a forward contract ◦futures price and the value of a futures contract b) discuss the assumptions under which futures and forward prices can be considered the same. c) describe how to incorporate discrete and continuous dividends into futures contracts on stocks and stock indices. d) explain and discuss the use of interest rate parity in pricing foreign currency forwards and futures. e) describe how spot prices are determined using the cost-of-carry model.
- Explain the basic differences between the operation of a currency forward market and a futures market. Then, discuss the main difference in the obligation of one with a long position in futures (or forward) contract in comparison to an options contractA currency speculator wants to speculate on the future movements of the €. The speculator expects the € to appreciate in the near future and decides to concentrate on the nearby contract. The broker requires a 2% Initial Margin (IM) and the Maintenance Margin (MM) is 75% of IM. Following € Futures quotes are currently available from the Chicago Mercantile Exchange (CME). Euro (CME) - €125,000; $/€ Open High Low Settle Change Open Interest June 1.2216 1.2276 1.2175 1.2259 -0.0018 255,420 Sept 1.2229 1.2288 1.2189 1.2269 - 0.0018 19,335 In addition to the information provided above, consider the following CME quotes that are available at the end of day one’s trading: Euro (CME) - €125,000; $/€ Open High Low Settle Change Open Interest June 1.2216 1.2276 1.2175 1.2176 -0.0083…exaplain how the following assist in hedging when the currency depreciates forwards Futures Turnkey Lumpsome contract Options Insurance
- Determine which of the following is NOT a distinguishing characteristic of futures contracts, relative to forward contracts. Question * A. Contracts are settled daily, and marked-to-market. B. Contracts are more liquid, as one can offset an obligation by taking the opposite position. C. Contracts are more customized to suit the buyer’s needs. D. Contracts are structured to minimize the effects of credit risk. E. Contracts have price limits, beyond which trading may be temporarily halted.discuss each point Futures contracts have a high degree of standardization, while forward contracts are very individualized. The trading of futures contracts takes place on exchanges, while the trading of forwarding contracts takes place over the counter.Suppose, on a certain day in February, a speculator observes the following prices in the foreign exchange and currency futures markets: GBP/USD spot: 1.6465 March futures: 1.6425 September futures: 1.6250 December futures: 1.6130 The speculator thinks that the markets are overestimating the weakness of sterling (GBP) against the dollar. How can she act on this view to make a profit? Under what circumstances do her actions lead to a loss?
- The fact that the clearinghouse is the counterparty to every futures contract issued is important because it eliminates _________ risk. A. Market B. Basis C. Interest rate D. Credit(a) The transferring of risk onto the clearing house is not something unique to futures trading. In fact, most of financial intermediaries such as insurance companies, finance companies and bank take on risk transferred to them and manage these risks. Based on the above statement, discuss the TWO (2) types of margins in derivatives markets. (b) You as a farmer have gone short 15 March Cocoa futures contracts. The 5-day period using hypothetical futures settlement prices. On the day 0 which both parties enter the contract. Given the following information, determine the daily marking-to-market adjustment to both you and the counterparty account. (Assuming same total value) Contract size = 10 tons per contract Initial margin = 10 percent of total value Maintenance margin = 70 percent of initial marginAdvantages of currency futures contracts relative to forward contracts include _ a. Higher liquidity b. Standardized contract specifications c. Freedom to sell the contract before maturity d. All of the above