Week 1

Question 1

Derivatives can be used to

Answer 1

Hedge risks;
Speculate;
take a view on the future direction of the market
Lock in an arbitrage profit;
Change the nature of a liability; and,
Change the nature of an investment without incurring the costs of selling one portfolio and buying another.

Question 2

A futures/forward contract

Answer 2

is an agreement to buy or sell an asset at a certain time in the future for a certain price.

Question 3

spot contract

Answer 3

there is an agreement to buy or sell the asset immediately (or within a very short period of time).

Question 4

The future/forward prices for a particular contract is

Answer 4

the price at which you agree to buy or sell the underlying asset.
It is determined by supply and demand in the same way as a spot price.

Question 5

In a forward or futures contracts:

The party that has agreed to buy has

Answer 5

a long position. They have a final payoff of St-F

Question 6

In a forward or futures contracts:

The party that has agreed to sell has a

Answer 6

a short position. They have a final payoff of F- St.

Question 7

. Forwards and Futures Contracts

when is money exchanged?

Answer 7

on the maturity date

Question 8

difference between forwards and futures

Answer 8

Forward contracts are traded in the over-the-counter market.

Futures contracts on the other hand are exchange traded instruments.
In Australia, futures contracts are traded on the Australian Securities Exchange (ASX).

Question 9

prominent feature of futures contracts?

Answer 9

marking to market whereby intermediate gains and losses are posted each day during the life of the futures

The intermediate gains or losses are given by the difference between today’s futures price and yesterday’s futures price.
These monies are transferred between the margin accounts of contract parties.