Forward & Future Contracts

What is a forward contract?

• A forward contract is a type of insurance policy

• A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.

• A forward contract is a type of cryptocurrency

• A forward contract is a type of stock exchange

Answer explanation

A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.

What are the characteristics of a future contract?

• Flexible terms, no margin requirements, monthly settlement

• Non-standardized terms, no margin requirements, annual settlement

• Standardized terms, margin requirements, daily settlement

• Customized terms, high margin requirements, weekly settlement

Answer explanation

Standardized terms, margin requirements, daily settlement

How can forward contracts be used for hedging?

• Forward contracts can be used for hedging by speculating on price movements

• Forward contracts can be used for hedging by increasing exposure to market risks

• Forward contracts can be used for hedging by guaranteeing immediate profits

• Forward contracts can be used for hedging by locking in a future price for an asset, protecting against price fluctuations.

Answer explanation

Forward contracts can be used for hedging by locking in a future price for an asset, protecting against price fluctuations.

Explain the pricing of forward contracts.

• The pricing of forward contracts does not consider the time to maturity.

• Forward contracts are priced based on historical data of the underlying asset.

• The pricing of forward contracts is solely determined by the demand in the market.

• The pricing of forward contracts is based on the spot price of the underlying asset, the risk-free interest rate, the time to maturity, and any holding costs.

Answer explanation

The pricing of forward contracts is based on the spot price of the underlying asset, the risk-free interest rate, the time to maturity, and any holding costs.

What are margin requirements for future contracts?

• Margin requirements for future contracts are fixed for all traders

• Margin requirements for future contracts are the minimum amount of funds that must be deposited by a trader with their broker to cover potential losses.

• Margin requirements for future contracts are set by the government

• Margin requirements for future contracts are not necessary

Answer explanation

Margin requirements for future contracts are the minimum amount of funds that must be deposited by a trader with their broker to cover potential losses.

Define initial margin in the context of future contracts.

• The final payment required for the contract

• The price at which the contract was initially purchased

• Amount of money deposited to cover potential future losses.

• Amount of money deposited to earn interest

Answer explanation

Amount of money deposited to cover potential future losses.

What is maintenance margin in future contracts?

• Minimum amount of equity required to cover potential losses in a margin account.

• Maximum amount of equity required to cover potential losses in a margin account.

• The total value of the securities held in a margin account.

• The amount of money that must be deposited in a margin account before trading on margin.

Answer explanation

Minimum amount of equity required to cover potential losses in a margin account.

Describe mark to market margin in future contracts.

• Mark to market margin in future contracts involves adjusting margin requirements based on the current market value of the contract.

• Mark to market margin in future contracts is based on historical contract values

• Mark to market margin in future contracts is determined by the buyer only

• Mark to market margin in future contracts is fixed and does not change

Answer explanation

Mark to market margin in future contracts involves adjusting margin requirements based on the current market value of the contract.

How is the cost of carry relevant in future contracts?

• The cost of carry is relevant in future contracts as it represents the cost of holding an asset until the delivery date, including storage costs, interest rates, and dividends.

• Cost of carry has no impact on future contracts as it is irrelevant to the trading process.

• The cost of carry in future contracts is solely determined by the asset's current market value.

• Future contracts do not consider the cost of carry, focusing only on the delivery date.

Answer explanation

The cost of carry is relevant in future contracts as it represents the cost of holding an asset until the delivery date, including storage costs, interest rates, and dividends.

What is the purpose of a forward contract?

• To learn a new language

• To bake a cake

• To lock in a future price for an asset and hedge against risk or speculate on price movements.

• To walk a dog

Answer explanation

The purpose of a forward contract is to lock in a future price for an asset and hedge against risk or speculate on price movements.