jawz

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.

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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.

jawz

Which of the following is NOT a feature that distinguishes futures contracts from forward contracts? Futures contracts:

A) are regulated by the government.

B) cover a specific quantity of the underlying asset.

C) are not customized securities.

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Both futures contracts and forward contracts cover a specific quantity of the underlying asset. The other characteristics only apply to futures contracts.

jawz

Which of the following statements about forward contracts and futures contracts is NOT correct? Forwards:

A) have no default risk, unlike futures.

B) are private contracts, unlike futures.

C) are unique contracts, unlike futures.

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Forwards have default risk because the seller may not deliver and the buyer may not accept delivery.

jawz

Which of the following is a difference between futures and forward contracts? Futures contracts are:

A) standardized.

B) over-the-counter instruments.

C) larger than forward contracts.

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As opposed to forward contracts, futures contracts are traded over an organized exchange and are standardized in size, maturity, quality of deliverable, etc.

jawz

Which of the following statements about futures and forwards is NOT correct?

A) Futures contracts are highly structured; forward contracts are unique to each transaction.

B) The buyer of a forward posts a margin directly with the seller.

C) An individual could sell an asset in the future using either a future or a forward contract.

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Although forward contracts are between private parties, no margin is required. The other statements are true. Futures and forwards are both contracts to sell an asset in the future.

jawz

Standardized futures contracts are an aid to increased market liquidity because:

A) uniformity of the contract terms broadens the market for the futures by appealing to a greater number of traders.

B) standardization of the futures contract stabilizes the market price of the underlying commodity.

C) standardization results in less trading activity.

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Although a forward may have value to someone other than the original counterparties, the non-standardized terms limit the level of interest, hence its marketability and liquidity. The standardized terms of a future give it far more flexibility to traders, giving rise to a strong secondary market and greater liquidity.

jawz

Futures have greater market liquidity than forward contracts, because futures are:

A) developed with specific characteristics to meet the needs of the buyer.

B) standardized contracts.

C) sold only for widely traded commodities, unlike forwards.

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Forward contracts do not have standardized terms as futures have. Forwards have the same terms as futures, but those terms are written to meet the specific needs of the two or more parties to the contract. This specialization limits the marketability, hence liquidity, of the forward contact.

jawz

Which of the following statements regarding futures and forward contracts is least accurate?

A) Futures contracts are highly standardized.

B) Both forward contracts and futures contracts trade on organized exchanges.

C) Forwards require no cash transactions until the delivery date, while futures require a margin deposit when the position is opened.

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Forward contracts are custom-tailored contracts and are not exchange traded while futures contracts are standardized and are traded on an organized exchange.

jawz

Which of the following statements regarding forwards and futures is NOT correct?

A) Unlike forwards, futures are always deliverable contracts.

B) Unlike futures, forwards carry counterparty risk.

C) Like futures, forwards are priced to have zero value at contract initiation.

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There are both deliverable and cash settlement futures contracts, just as with forwards.

jawz

Which of the following statements regarding both futures contracts and forward contracts is least accurate?

A) They are priced to have zero value at the initiation of the contract.

B) They carry counterparty risk.

C) For deliverable contracts, the short must deliver the underlying asset at a future date.

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The clearinghouse of the futures exchange is the counterparty to all futures contracts so that, unlike forward contracts, counterparty risk is not a concern with futures contracts.