Futures contracts:
A) are identical to forward contracts except for the size of the contract.
B) provide an option to purchase an asset at a specified price on the settlement date.
C) are marked to the market on a daily basis which helps eliminate credit risk.
D) are less popular in organized trading then are forward contracts.
E) are limited to contracts on financial assets.

Question

Quizplus · Accepted Answer

Futures contracts are marked to market on a daily basis, which means that any losses or gains are settled in cash each day. This process helps eliminate credit risk, as both parties have to post collateral to cover potential losses. Futures contracts are not identical to forward contracts, as they are standardized and traded on exchanges, while forward contracts are customized and traded privately. Futures contracts do not provide an option to purchase an asset, as the buyer is obligated to buy and the seller is obligated to sell at the agreed-upon price and date. Futures contracts can be traded on a wide range of assets, including commodities, currencies, and financial instruments.

Futures Contracts