Futures <-> Forwards

Question 0

Futures contracts

Answer 0

1. traded on exchanges
2. standardized (e.g. size, underlying assets, delivery)
3. range of delivery dates (link with delivery cards!!!!)
4. settled daily
5. virtually no credit or counterparty risk
6. normally closed before maturity

Question 1

Forward Contract

Answer 1

1. private contract between two parties
2. traded in the OTC market (link with OTC market cards!!!!)
3. not standardized -> can be personalized to fit individual needs
4. usually specified delivery date
5. settled at the end of the contract
6. Credit or counterparty risk except if there is collateralization
7. delivery or final cash settlement usually takes place

Question 2

Margin System

Answer 2

A margin account is adjusted daily to reflect daily gains and losses because of the daily futures price changes.

Balance of the margin account falls below a certain amount (MAINTENANCE MARGIN)

• > MARGIN CALL is issued
• > investor needs to deposit additional funds or his or her broker closes all the futures contracts.

Question 3

Electronic Trading

Answer 3

Computer matches buyers and sellers.