Briefly distinguish between a forward foreign exchange contract and a currency futures contract.

What will be an ideal response?


POSSIBLE RESPONSE: Currency futures and currency forward contracts are financial contracts that are similar in nature but do have important differences. The main difference is that currency futures contracts are highly standardized and traded on an exchange, whereas currency forward contracts are tailored to meet the specific requirements of the buyer or seller. Currency forward contracts are not traded on an exchange, but over-the-counter.

Currency futures contracts are standardized because the expiration date and contracted amounts are predetermined. For example, euro (EUR) currency futures contracts are available with quarterly expiration dates in the months of March, June, September, and December and the contract size of each euro future is set at €125,000. Forward contracts, on the other hand, are not restricted by size or expiration date. These are determined by the buyer and seller to meet a specific or unique requirement. With a currency futures contract, investors have to pay for the contract and may need to post margin requirements. With a currency forward contract, no initial outlay is needed and collateral is generally not required. An exchange clearing house acts as the counterparty to both the buyer and the seller of a currency futures contract and requires margins to be posted. Currency futures contracts are "marked to market" daily. Since currency forward contracts are settled at the time of delivery, the profit or loss is only realized at the time of settlement. A loss that results from default is much greater for participants in a forward contract. Futures contracts can be traded in a secondary market, whereas there is no secondary market for forward contracts.

Economics

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If an airline company has several empty seats on a flight and the full price of an air ticket is $500 and the marginal cost per passenger is $100, then it will be profitable for the airline to

a. charge a stand-by passenger no less than the full fare of $500. b. charge a stand-by passenger less than $100. c. charge a stand-by passenger more than $500. d. charge a stand-by passenger more than $100. e. fill the seats at the last minute for any price.

Economics

While waiting in line to buy two tacos at 75 cents each, and a medium drink for 80 cents, Emma notices that the restaurant has a value meal containing three tacos and a medium drink all for $2.50 . For Emma, the marginal cost of purchasing the third taco would be

a. zero. b. 20 cents. c. 75 cents. d. 80 cents.

Economics

In order to function as a medium of exchange, money must:

A. be backed by gold. B. be generally accepted in exchange for goods and services. C. be backed by some precious commodity. D. maintain a constant value over an extended period of time.

Economics