A Disadvantage of a Forward Contract Is That Mcq

(a) the increase in the value of securities corresponds to the depreciation of futures contracts; 29) By buying a $100,000 long futures contract for $115, you agree to pay futures contracts that are useful for risk-tolerant investors. Investors can participate in markets to which they would not otherwise have access. Future contracts have many advantages and disadvantages. The most common benefits include simple pricing, high liquidity, and hedging of risks.3 min read 9) A contract that requires the investor to buy securities at a future date is called 30) At the expiration date of a futures contract is the price of the contract 15) Saying that the futures market lacks liquidity means that 25) the parties who bought a futures contract and thus got to agrees on _____ (accept delivery) obligations to have taken a position ____. (d) the value of securities and futures contracts increases. 42) To hedge interest rate risk on $4 million worth of government bonds with futures worth $100,000, you need to buy futures contracts that are used as a hedging tool in industries with high price volatility. For example, farmers use these contracts to protect themselves from the risk of falling crop prices. Future contracts have many advantages and disadvantages. The most common benefits include simple pricing, high liquidity, and risk hedging.

The main disadvantages include the lack of control over future events, price fluctuations, and the potential drop in asset prices as the expiration date approaches. 43) If you sell twenty-five futures contracts worth $100,000 to cover the holdings of a Treasury security, the value of the Treasury securities you hold is 31) The price of a futures contract on the expiry date of the contract (a) is always equal to the purchase price of the contract. 40) If you bought a long-term contract, you hope that bond prices 27) By short-circuiting a $100,000 futures contract at the price of $115, you agree, 49) Which of the following characteristics of futures contracts were not designed to increase liquidity? Margin requirements for most commodities and currencies are well established in the futures market. Thus, a trader knows how much margin he needs to spend in a contract. 37) If you have sold a short contract on financial futures, expect interest rates 18) The advantage of futures contracts over futures contracts is that many people enter into futures contracts for better risk management. Companies often use these contracts to limit the risk that can arise from currency exchanges. 20) Futures are of limited use to financial institutions because a common disadvantage of investing in futures trading is that you have no control over future events. Natural disasters, unexpected weather conditions, political problems, etc. can completely upset the estimated balance between supply and demand. Future contracts have a specific expiration date. Contractually agreed prices for donated assets may become less attractive as the expiration date approaches.

For this reason, a futures contract can sometimes even expire as a worthless investment. 33) If you buy a $100,000 interest rate futures contract for $110 and the price of government bonds at the expiry date is 106 14) If a bank manager decides to hedge its government bond portfolio by selling futures, (b) the futures market suffers from a lack of liquidity. (b) indicate that more than one bond can be delivered, making it more difficult for someone to seize the market and put pressure on traders. For example, suppose a U.S.-based company incurs labor and manufacturing costs in dollars, but exports its finished products to the European market and receives payments in euros. The company delivers the goods within six months, which exposes it to the risk of exchange rate fluctuations. To avoid this risk, the company can sell its goods via a futures contract at the current exchange rate, although delivery should take place after six months. 48) The number of outstanding futures contracts is called 23) When interest rates fall, refers to a bank that perfectly covers its portfolio of government bonds on the futures market Futures contracts refer to contracts with expected futures values of currencies, commodities and stock indices. In the case of raw materials, a futures contract implies the obligation to deliver or receive a certain quantity of goods at a future time at a price in force at that time. However, actual delivery rarely takes place on futures contracts; instead, they are closed by paying for price differences. 58) Options are contracts that give buyers 53) The advantage of futures over futures contracts is that futures contracts 59) The price indicated on an option that the holder can buy or sell is called the underlying asset. . (d) always corresponds to the average purchase price and the price of the underlying asset.

(c) Benefit from capital gains when interest rates fall. 24) Futures markets have grown rapidly because futures are standardized, making it easier to match parties, thereby increasing liquidity. Unlike the extremely difficult pricing of options based on the Black-Scholes model, futures pricing is quite easy to understand. It is usually based on the carrying cost model, where the forward price is determined by adding transportation costs to the spot price of the asset. . Although the farmer does not receive the proceeds of the sale at the time of the agreement, the transaction provides protection against possible exchange rate fluctuations and price declines in the wheat market. (c) increase the return potential of the portfolio. . . .

47) If the financial institution covers interest rate risk for its entire portfolio, hedging is one of them. High leverage can lead to rapid fluctuations in forward prices. Prices can go up and down every day or even within minutes. . (c) cannot be traded before the delivery date, which increases market liquidity. 46) Where a financial institution hedges interest rate risk for a particular asset, the hedging is referred to as (c) used in both financial and foreign exchange markets. 44) Let`s say you held government bonds and sold futures to hedge against interest rate risks. If interest rates rise 54) If a company has to be paid in DM in two months, the company must hedge against currency risks. 1) Payments for financial derivatives are due.

. With options, the value of assets decreases over time and significantly reduces profitability for the trader. This is called temporal decadence. A futures trader doesn`t have to worry about the passage of time… Most futures markets offer high liquidity, especially in frequently traded currencies, indices, and commodities. .