Intro to Forwards/Futures and Options

Question 1

Futures contracts are traded in organized exchanges, whereas …….. contracts forward contracts are tailor made agreements and take place in the over the counter market (OTC market)

Answer 1

forward

Question 2

A foward contract is an agreement to buy or sell an asset for a certain price at a ……. time

Answer 2

certain

Question 3

A forward contract is traded in the … market

Answer 3

OTC (Over the Counter)

Question 4

The party that has agreed to buy the asset forward has a ‘…..’ position. The party that has agreed to sell it has a ‘…..’ position

Answer 4

long/short

Question 5

one of the major differences between forward contracts and futures contracts is futures contracts are ……….

Answer 5

standardised (so the specifications are known in advance. In other words:
- how many units of the underlying asset will be delivered
- Whether actually there’s going to be physical delivery or whether it’s going to be cash settlement upon the end, depending on the type of the underlying assets.
- The expiration date of the futures contract etc.

Question 6

The gap between the bid and offer price is known as the ‘… …… …..’

Answer 6

Bid offer spread

Question 7

The forward exchange rate is determined by the ‘……… ….. ………’ between the two countries involved

Answer 7

Interest rate differential

Question 8

the fact that there’s full transparency about the terms, what is involved in the contract makes futures contracts ideal to be traded on …………. ………. Forward contracts are traded over the counter (OTC), whilst futures contracts are traded in ………. …………..

Answer 8

organised exchanges

Question 9

ICE

Answer 9

The Intercontinental Exchange (ICE)

Question 10

call options give you the right to … a number of units in the underlying asset normally … shares,

Answer 10

buy / 100

Question 11

a put option gives you the right to …. the underlying assets

Answer 11

sell

Question 12

The price of an Options contract is what the holder pays to enter their position. So a long position in in an Options contract means that the investor has to pay up this ………. or the price of the option to enter this agreement.

Answer 12

premium

Question 13

The greater the amount of time remaining until maturity, the more ……… the call options contract is

Answer 13

expensive

Question 14

Leverage

Answer 14

Potential profits and losses are magnified through the use of derivatives contracts