Explain why a forward contract may actually carry more risk than a futures contract.
What will be an ideal response?
A forward contract is a private agreement between two parties that is customized for the two parties. As a result, the high degree of customization makes them very difficult if not impossible to resell. Futures contracts on the other hand are highly standardized. The high level of standardization allows them to be bought and sold on organized exchanges, which increases their liquidity and reduces risk. In addition, forward contracts are private agreements and thus carry greater default risk. Futures contracts are usually settled through clearing corporations where procedures such as mark to market greatly reduce default risk.
You might also like to view...
What is the biggest problem of using government actions such as taxes and pollution charges to control external costs?
A) insufficient legal power to enforce the controls B) obtaining enough data to determine how much the tax or pollution charge will be C) In some situations, there is no known way to control the external costs. D) political lobbying and voter disagreement E) The Coase theorem points out that taxes and pollution charges work only in the short run and not in the long run.
At any price below the equilibrium price, the: a. demand is greater than supply
b. supply is greater than demand. c. quantity demanded is greater than quantity supplied. d. quantity supplied is greater than quantity demanded.
A price cut will decrease the total revenue a firm receives if the demand for its product is: a. elastic
b. inelastic. c. unit elastic. d. unit inelastic.
By pursuing growth, some less developed countries have sacrificed other social goals, especially
a. a clean environment b. investment opportunities c. human capital formation d. physical capital formation e. a high long-run standard of living