Chapter 2: Derivatives 2

Question 1

Outline the main differences between traditional futures and forward contracts

Answer 1

Futures

Exchange traded
Standardised
index futures available
Highly marketable
Delivery price determined
openly in market place
Clearing house guarantee so no credit risk 
Margin 
Can be closed out prior to maturity

Forwards

Over the counter
Tailored 
Normally based on specific security 
No or poor marketability 
delivery price negotiated privately 
no clearing house or CCP so there is credit risk
Usually no margin
Difficult to close out

Question 2

What is the main differences between options and futures

Answer 2

Trade options

Holder has option, writer has obligation
Writer deposits margin, buyer doesn't 
buyer pays premium to writer 
standardised strike price
Futures

Both parties committed to trade
both parties deposit margin
No money exchanged upfront
traders negotiate delivery