Which of the following are economic functions of futures markets? Flexibility in pricing products and inputs Information collection and dissemination Price discovery Transferring risk Coordinating economic activity to reduce marketing costs Market stability

Which of the following are economic functions of futures markets? Flexibility in pricing products and inputs Information collection and dissemination Price discovery Transferring risk Coordinating economic activity to reduce marketing costs Market stability

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 4BIC

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Concept explainers

Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.

Question

Which of the following are economic functions of futures markets?
Flexibility in pricing products and inputs
Information collection and dissemination
Price discovery
Transferring risk
Coordinating economic activity to reduce marketing costs
Market stability
Hedging is taking the opposite position in the futures market as in the cash market,
concurrently. This allows the producer to secure a certain price in the market.
True
False

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The futures market is referred to as an auction market, whereby producers and suppliers of commodities endeavour to avoid market volatility; in other words, producers and suppliers negotiate contracts with an investor who agrees to take on probable risk and reward, based on the expected volatility of the market. Critically discuss the theoretical concept of futures contracts as a risk management tool, used by any would be investor to decrease future risk exposure or market volatility. What were the main reasons for this fall into the negative realm? Critically discuss. After May 2020, what are the prospects of futures contracts as a significant risk management tool for firms? Discuss critically.
Which is a key difference a manager should note in choosing between forward and futures contracts?a. Exchange trading makes forward contracts more liquid.b. Futures contracts carry standardized terms, while forward contracts can be tailored to meet specific needs.c. Futures contracts have greater default risk than forward contracts.d. Forward contracts require initial margin deposits and daily marking to market, while futures do not.
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