Module 48.1: Forwards and Futures

Question 1

What is a derivative?

Answer 1

a security that derives it’s value from the value or return of another asset

Question 2

What is the over the counter market?

Answer 2

instruments that are traded / created by dealers with no central location. Largely unregulated markets and each contract is with a counterparty.

Question 3

What is a forward commitments vs. contingent claim?

Answer 3

forward commitment is a binding promise to perform some action in the future.

contingent claim is a claim that depends on a particular event. Options are contingent claims on stock prices.

Question 4

Is a payment made at the initiation of a forward contract?

Answer 4

no

Question 5

In a forward contract, who has the long forward position and who has the short forward position?

Answer 5

long forward - the party that agrees to buy the asset

Short forward - the party that agrees to sell the position

Question 6

What is the primary way that futures differ from forwards?

Answer 6

futures are traded in an active secondary market, subject to greater regulation, backed by a clearinghouse, and require a daily cash settlement of gains and losses.

Question 7

what is the role of a clearinghouse in futures trading?

Answer 7

guarantees traders in the futures market will honor their obligations. It does this by splitting each trade once it is made and acting as the opposite side of the position.

Question 8

What is different between maintence margin for futures trading and maintencen margin for equity trading?

Answer 8

futures maintennce margin requires investor to contribute funds to bring balance back to the initial margin amount, not the maintenance margin.