Chapter 1:2 Futures & Forwards

Question 1

What is a Future?

Answer 1

A legal agreement between 2 parties to make / take delivery of a specific quantity and quality of a specified asset on a fixed future date at a pre-agreed price today.

Question 2

Where are Futures contracts traded?

Answer 2

On organised exchanges.

Question 3

What do the terms of Futures contracts look like?

Answer 3

Standardised contracts, called Contract Specifications.

Question 4

Why are Contract Specifications used?

Answer 4

Because it’s not financially viable for exchanges to satisfy every traders’ requirements regarding particular underlying assets.

Question 5

What is the Aim of Contract Specifications?

Answer 5

Allows participants to take positions on general price movements in any given market.

Question 6

What do Contract Specifications provide?

Answer 6

Transparency by detailing what’s acceptable in terms of quality and type of assets to be traded.

Question 7

Who negotiates the price of a Futures contract?

Answer 7

The buyer and seller of the contract.

Question 8

What terms does the Exchange set?

Answer 8

• The Contract Specifications standardised details.
• Minimum permitted movement prices and method of quotation.
• Fixed future date - the contract month.