Chapter 3 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
• Clearling house guarantee so no credit risk
• Margin
• Cna be closed dout prior to matrurity

Forwards

• Over the counter
• Tailored
• Normally based on specific secuirity
• No or poor marketability
• delivery price negotiated privately
• no cleraing 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 deposts margin, buyer doesn’t
• buyer pays premium to writer
• standardised strike price

Futures

• Both parties commited to trade
• both parites deposit margin
• No money exchanged upfront
• traders negotiate delivery