Variations on the Forward concept

Question 1

What are the 4 ways to own a stock at time T?

Answer 1

1. Outright purchase
2. Fully leveraged purchase
3. Prepaid forward
4. forward

Question 2

What is a fully leveraged purchase?

Answer 2

Buy the stock and borrow the money. Repay the loan at time T.

Question 3

What is a prepaid forward?

Answer 3

Pay for the forward at time 0, get the asset at expiration.

Question 4

What is a Future contract?

Answer 4

An exchange-traded forward contract.

Question 5

What are the differences between a forward and a future contract?

Answer 5

1. Forwards are customized contract and futures are standardized contracts.
2. Futures have price limits (halt to trading) that stop the price of the asset from dropping to much
3. Futures are liquid
4. Futures are marked-to-market
5. Daily settlement and margin accounts reduce credit risk on futures contracts

Question 6

What is the maintenance margin?

Answer 6

High percentage of the initial margin that must be in the account at all time.

Question 7

What is a margin call?

Answer 7

If the amount in the account falls below the maintenance margin level, their is a margin call made to the investor to ask him to put enough funds in the account to bring back the amount up to the initial margin.