Forwards & Futures Flashcards
What is the spot market ?
The spot market, otherwise known as the cash market is the market where underlying securities are delivered immediately or within a short timeframe.
U.S. Treasury Bills trade ____ while most bonds and equities trade ____.
U.S. Treasury Bills trade T+1 while most bonds and equities trade T+2.
____ regulates the futures and options market in the U.S.
Commodity Futures Trading Commissions (CFTC)
What is a forward contract?
A contract between two parties. One party agrees to buy a product from another party at a later date at a price agreed upon today.
Give 3 characteristics of forwards.
- Mostly traded over the counter
- Are customizable
- Subject to credit and settlement risk
What are futures?
A contact between two parties. One party agrees to buy a product from another party at a later date at a price agreed upon today.
Give 3 characteristics of futures.
- Are exchange traded
- Are standardized
- Are marked to market daily which could create cash flow issues
Is daily settlement required for forwards or futures ?
Futures
Explain the ‘Law of One Price’
The economic theory that the price of an identical asset traded anywhere should have the same price regardless of location when currency exchange rates are taken into consideration.
