A futures contract is a forward contract with some important differences. Explain.
What will be an ideal response?
A futures contract is a forward contract that has been standardized and which is sold through an organized exchange. Forward contracts generally are private agreements between two parties and as a result are customized and therefore difficult to sell. The high level of standardization of futures increases their liquidity and reduces risk. In addition, since forward contracts are private agreements they carry greater default risk. Futures contracts are usually settled through clearing corporations that serve as the actual counterparty. The two parties to a futures contract make an agreement with the clearing corporation that acts like an insurance company, guaranteeing that both parties will meet their obligations. Moreover, procedures such as mark to market greatly reduce default risk. As a result of these differences, the efficiency and use of futures contracts are enhanced.
You might also like to view...
Government decisions about the level of taxation and public spending are called:
A. fiscal policy. B. monetary policy. C. congressional policy. D. legislative budgeting policy.
If there were a 20% reserve requirement, how much would the deposit multiplier be?
What will be an ideal response?
Which of the following is true under monopoly?
A. P = MR B. P > ATC C. P > MC D. P = ATC
Economic takeoff:
A. occurs when development becomes self-sustaining. B. will eventually occur in all developing countries. C. typically occurs in the absence of foreign investment. D. has yet to occur in any developing country.