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A)	Valuation can be estimated at any point before maturity.

B)	Regulation is not an issue.

C)	Action is taken in the future.

This is the only statement that does not necessarily apply to forward contracts. Some are regulated. Some are not regulated.

Which of the following statements regarding a forward commitment is NOT correct? A forward commitment:

A)	is a contractual promise.

B)	is not legally binding.

C)	can involve a stock index.

A forward commitment is a legally binding promise to perform some action in the future and can involve a stock index or portfolio.

Typically, forward commitments are made with respect to all the following EXCEPT:

Forward commitments can be customized and could be written on some measure of inflation, but typically they are not. The volume of forward commitments, including forward contracts and futures contracts, on bonds, equities, and interest rates is in the many billions of dollars.

Which of the following statements about forward and future contracts is least accurate?

A)	The primary difference between forwards and futures is that only futures are considered financial derivatives.

B)	A predetermined price to be paid for a good is a necessary requirement in the terms of a forward contract.

C)	A future requires the contract purchaser to receive delivery of the good at a specified time.

Forwards and futures are similar and serve similar needs. Both are considered types of financial derivatives in that payoffs depend on another financial instrument or asset. The primary difference is that forwards are designed for the needs of the particular parties entering the contract, where futures are standardized contracts.

If an oil wholesaler expects to buy some gasoline for his customers in the future and wants to hedge his risk using a standardized and specific contract, he should:

A)	buy a crude oil forward contract.

B)	sell a crude oil futures contract.

C)	buy a crude oil futures contract.

A futures contract is a forward contract that has been highly standardized and closely specified. As with a forward contract, a futures contract calls for the exchange of some good at a future date for cash, with the payment for the good to occur at the future delivery date. The purchaser of the contract is to receive delivery of the good and pay for it, (here the oil wholesaler) while the seller of the contract promises to deliver the good and receive payment. The payment price is determined at the initial time of the contract.

If a farmer expects to sell his wheat in anticipation of a harvest and wants to hedge his risk, he needs to:

A)	sell wheat now.

B)	sell wheat futures contracts now.

C)	buy wheat futures contracts now.

A futures contract is a forward contract that has been highly standardized and closely specified. As with a forward contract, a futures contract calls for the exchange of some good at a future date for cash, with the payment for the good to occur at the future delivery date. The purchaser of the contract is to receive delivery of the good and pay for it while the seller (here the wheat farmer) of the contract promises to deliver the good and receive payment. The payment price is determined at the initial time of the contract.