Question

Fill in the most appropriate term relating to either futures or forward contracts

1. It is a zero-sum game. Choose...Forward contract or Futures contract
2. The exchange is for cash   Choose...Forward contract or Futures contract
3. The long position wins with a rise in market prices of the underlying asset.   Choose...Forward contract or Futures contract
4. The short position loses with a rise in market prices of the underlying asset.   Choose...Forward contract or Futures contract
5. Examples of such contracts are corn, wheat, oil and metal.   Choose...Forward contract or Futures contract
6. It is settled daily rather than some future date. Choose...Forward contract or Futures contract
7. The clearing house guarantees performance.   Choose...Forward contract or Futures contract
8. You never know who the actual counterparty is.

Answer 1

Following are the answers to each of the statements as given below:

1. It is a zero sum game.

Answer: Forward Contracts. In such contracts, the party which is having the profit is equivalent to same amount of loss which has been incurred by the other party, that is why, it is known as zero sum game.

2. The exchange is for cash.

Answer: Forward Contracts. In such contracts, the exchange of a financial assets is only made with exchange of cash that has been decided at the initiation of contract.

3. The long position wins with a rise in market prices of the underlying asset.

Answer: Futures Contracts. In such contracts, when there will rise in the market prices of underlying prices of asset then there will be benefit to the buyer of security in futures market as in case of forwards there is only exchange for cash.

4. The short position loses with a rise in market prices of the underlying asset.

Answer: Futures Contracts. Only in case of futures market, the short seller will loose the profit as in case of forward contracts the selling price has been already decided which is off course not for speculation.

5. Examples of such contracts are corn, wheat, oil and metal.

Answer: Forwards Contracts. For such contracts, only forwards contracts are executed as they are consumption assets.

6. It is settled daily rather than some future date.

Answer: Futures Contracts. In such case, only futures contracts are settled on daily basis to speculate the prices in the market otherwise for forward contracts, there is no generally profit motive.

7. The clearing house guarantees performance.

Answer: Futures Contracts. In case of futures, clearing house is in between the parties who are trading through a proper established exchange and that is why it is guranteed that all settlements will be done on timely basis.

8. You never know who the actual counterparty is.

Answer: Futures contracts. In such cases only, you will never know that who will be your conterparty because such trading is done through electronic trading system.

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