Which best explains what a futures contract does?
A futures contract allows an investor to speculate on the direction of a security, commodity, or financial instrument, either long or short, using leverage. Futures are also often used to hedge the price movement of the underlying asset to help prevent losses from unfavorable price changes.
What does a futures contract do?
Prices are always changing, but with a futures contract, people can lock in a fixed price to buy or sell at a future date. Locking in a price lessens the risk of being negatively impacted by price change. Let's look at how this might work for businesses using the coffee industry as an example.
Which of the following best explains what a futures contract is?
Explanation: A futures contract is a financial agreement between two parties to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future. The correct answer to the student's question is OA: A contract setting the price and date for a commodity purchase.
What is the basis of a futures contract?
The basis in derivatives is the difference between the spot price (current price) and the strike price (predefined price) of the futures contract. Basis in futures contracts works on the principle of price fluctuation of the underlying asset and how it is priced in its futures contract against its current price.
Which of the following best explains what a forward contract is brainly?
Explanation: A forward contract is a contract to deliver a particular commodity to a buyer sometime in the future. It is an agreement between two parties to buy or sell an asset at a predetermined price and date.
What is a futures contract quizlet?
A futures contract is an agreement to buy or sell an asset at a certain time in the future for a certain price, by contrast in a spot contract there is an agreement to buy or sell the asset immediately (or within a very short period of time).
What is an example of a futures contract?
For example, Crude Oil is currently selling at $60 a barrel, and a futures contract for $65 per barrel is available for three months' time. As you believe the price of WTI will rise beyond $65 by the time of expiry, you buy the contract.
What is a futures contract also known as?
It's also known as a derivative because future contracts derive their value from an underlying asset. Investors may purchase the right to buy or sell the underlying asset at a later date for a predetermined price.
What is the difference between a contract and a futures contract?
A forward contract is a private, customizable agreement that settles at the end of the agreement and is traded over the counter (OTC). A futures contract has standardized terms and is traded on an exchange, where prices are settled daily until the end of the contract.
Which of the following is a characteristic of a futures contract?
Which of the following is a characteristic of a futures contract? It is a standardized contract traded on an exchange. It gives the buyer the right, but not the obligation, to buy or sell the underlying asset at a specified price on a specified date.
What are the key elements to a successful futures contract?
The key elements in a Futures Contract are underlying asset, contract size, delivery date, price, and terms of delivery. The key elements in a Futures Contract are contract length, profit margin, and delivery method.
Which of the following best describe the difference between futures contract and forward contract?
Forwards are never marked to the market. Their distinctive features are exclusiveness and a specified price. Futures are marked to market daily, meaning they are settled every day until the contract's expiration date.
Which of the following is a forward contract?
Forward Contract is an agreement to exchange one currency for another currency on a specific date in future, at a pre-determined exchange rate, set at the time the contract is made.
Which of the following is the major difference between future and forward contract?
Here are some important differences between them. A forward contract is signed between party A and party B face to face (or over the counter), whereas in a futures contract there is an intermediary between the two parties. This intermediary is often called a clearance house, which is a part of a stock exchange.
How do futures contracts move?
Many financial futures contracts, such as the popular E-mini contracts, are cash settled upon expiration. This means on the last day of trading, the value of the contract is marked to market and the trader's account is debited or credited depending on whether there is a profit or loss.
What does a futures contract cost?
In short, the price of a futures contract (FP) will be equal to the spot price (SP) plus the net cost incurred in carrying the asset till the maturity date of the futures contract. Here Carry Cost refers to the cost of holding the asset till the futures contract matures.
Is a futures contract long or short?
Traders usually go long or open a buy position on certain Futures contracts when they believe that the Future's price is likely to rise in the future. On the flip side, when traders believe that the price will fall, they are more likely to open a short position, or in other words, they may go short.
What is a futures contract What are the general types of futures contracts?
The different types of futures contracts include equity futures, index futures, commodity futures, currency futures, interest rate futures, VIX futures, etc. The concept across all the types of futures is the same. They are all a contract between a buyer and seller for delivery at a future date.
Who is long in a futures contract?
Future. Going long in a future means the holder of the position is obliged to buy the underlying instrument at the contract price at expiry. The holder of the position will profit if the price of the underlying instrument goes up, as the price he will pay will be less than the market price.
What is a disadvantage of futures contract?
Future contracts have numerous advantages and disadvantages. The most prevalent benefits include simple pricing, high liquidity, and risk hedging. The primary disadvantages are having no influence over future events, price swings, and the possibility of asset price declines as the expiration date approaches.
What happens if you buy a futures contract?
You can buy or sell a futures contract. If you buy the contract, you agree to pay a certain price on a certain date. If you sell a contract, you agree to provide the underlying asset at the specified price.
Are futures contracts high risk?
Yes, it is possible to lose more money than you initially invested in futures trading. This is because futures contracts are leveraged, which means you can control a large position with a relatively small amount of investment upfront. 9 While leverage can amplify your gains, it can also magnify your losses.
Who is the buyer of a futures contract?
Buyer: The buyer of the futures contract is said to be taking a “long” position, i.e. profits if the price of the underlying asset increases. Seller: The seller is said to be holding a “short” position, i.e. profits if the price of the underlying asset declines.
Do futures have credit risk?
Futures are exchange-traded, while forwards are traded over-the-counter. Thus futures are standardized and face an exchange, while forwards are customized and face a non-exchange counterparty. Futures are margined, while forwards are not. Thus futures have significantly less credit risk, and have different funding.
Why are futures so volatile?
A futures contract is a derivative instrument, which follows the underlying asset price quote. Consequently, the volatility in the futures market is completely under the influence of factors, which influence the underlying asset price. Let's take oil as an example.
