Forward and Futures Markets

What is a derivative?

• A government bond

• A type of stock

• A financial instrument that derives its value from an underlying asset

• A currency exchange rate

Which of the following is a characteristic of forward contracts?

• They have fixed expiration dates

• They have a liquid market

• They can be customized to the needs of the parties

• They are standardized and traded on exchanges

What is the primary purpose of derivative markets?

• To eliminate all risks

• To facilitate hedging

• To increase market volatility

• To facilitate speculation

What is the main disadvantage of forward contracts?

• They are highly liquid

• They have high default risk

• They are standardized

• They have a secondary market

In futures trading, what does 'marking to market' refer to?

• Setting the initial margin requirement

• Calculating the basis risk

• Adjusting the margin account to reflect daily gains or losses

• Determining the futures price at expiration

What is the basis in futures trading?

• The risk of default by a counterparty

• The difference between cash price and futures price

• The total value of a futures contract

• The initial margin required to open a position

What happens to the futures price as the maturity date approaches?

• It becomes irrelevant

• It converges with the spot price

• It remains constant

• It diverges from the spot price

What is a key advantage of futures contracts over forward contracts?

• They can be customized

• They have a liquid market

• They have no default risk

• They are more flexible