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Which statement is true about the difference between futures and forward contracts? 1. If there are significant price fluctuations before the maturity date, futures contracts can lead to more unfavorable results compared to forward contracts. 2. None of them. 3. Futures contracts are settled at the end of the maturity, while forward contracts are settled daily. 4. Futures contracts are traded on the exchange, while forward contracts are traded on CCP. 5. Futures contracts have a fixed price, while forward contracts have a price determined at the maturity.
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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.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.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.
- Consider the following two scenarios whereby the cost-of-carry model is violated. You are required to select appropriate missing words and fill in question 1. a. long b. spot c. over priced d. short arbitrage e. under priced f. long arbitrage g. futures h. short Question 1 a. If ft >S0 (1 + rf - d)^t, then the( ) is ( )relative to ( ) or equivalently, the quoted futures price is higher than what it should be. Thus, the correct arbitrage strategy should be: ( ) the futures contract and ( )the spot market. This strategy is also known as ( ). b. If ft <S0 (1 + rf - d)^t, then the( ) is ( )relative to ( ) or equivalently, the quoted futures price is lower than what it should be. Thus, the correct arbitrage strategy should be: ( ) the futures contract and ( )the spot market. This strategy is also known as ( ).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.Which of the following is true? A.Forward contract buyers and sellers do not know who the counterparty is B.Future contracts are marked to market daily. C.Forward contracts have no default risk. D.Futures contracts involve high default risk
- Basis risk refers to the risk: a. associated with unanticipated price movements on the underlying asset. b. of default on the futures contract. c. associated with anticipated price movements in the cash market. d. from a change in the spread between the price on the commodity or financial security in the physical market and the price of the related futures contract.The basis is defined as spot minus futures prices. Evaluate which of the following is most likely to contribute to an increase in basis risk. Select one alternative A large difference between the futures prices when the hedge is put in place and when it is closed out. Increased similarity between the underlying asset of the futures contract and the hedger’s exposure. An increase in the time between the date when the futures contract is closed and its delivery month. None of the other answers.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
- The basis is defined as the spot price minus the futures price. A trader is hedging the sale of an asset with a short futures position. The basis falls unexpectedly. Which of the following is TRUE? a. The hedger’s position worsens. b. The hedger’s position improves. c. The hedger’s position stays the same. d. The hedger’s position sometimes worsens and sometimes improves.In the futures markets, when the initial margin of a futures account is topped up daily to cover adverse futures price movements, this is called: a. maintenance margin call. b. closing-out. c. short call. d. marked-to-market.The basis is defined as the spot price minus the futures price. A trader is hedging the sale of an asset with a short futures position. The basis falls unexpectedly. Which of the following is true? Question 3Answer a. The hedger’s position sometimes worsens and sometimes improves. b. The hedger’s position stays the same. c. The hedger’s position worsens. d. The hedger’s position improves.