Lecture 11: Futures

Question 1

What are the 2 types of future markets

Answer 1

financial futures

commodity futures

Question 2

What are the similarities between a spot/cash market and futures market?

Answer 2

traded in organised exchange
types of orders are similar
contract price determined on transaction date

Question 3

What are the differences between a spot/cash market and futures market?

Answer 3

timing of delivery/settlement of underlying asset

Settlement of contract amount

Question 4

What are the 3 common types of financial futures transactions?

Answer 4

short hedge
long hedge
speculative trade

Question 5

What are the two types of interest rate futures?

Answer 5

Fed Fund futures (short term)

Us treasury bonds (long term) T-bond

Question 6

What is a future contract?

Answer 6

a legally binding agreement
between 2 parties
to buy or sell a specified quantity of asset
through exchange
at a price determined today
with delivery to be made in the future

Question 7

What are the characteristics of an organised exchange

Answer 7

standardised quantity (contract)
specific stock or futures
Only member companies can excute
high liquidity 
counter-party risk removed

Question 8

Why is it not possible to achieve a perfect hedge?

Answer 8

price changes in future and cash market not in same quantum

standard size of futures contract not the same size in the cash market