Question

Suppose the 90-day LIBOR=3%. At the expiration, which one of the following two derivative product offers higher amount at expiration? Suppose we have one forward and one futures, both with notional amount of $10,000,000.

		Higher amount in the futures market
		Higher amount in the forward market
		Same amount
		Cannot determine because lack of information

Answer 1

Answer D) Cannot Determine Because of lack of information

Futures contracts are standardised contracts traded on exchange where in one party agrees to purchase a secuity in future from another counterparty. Future contracts require margin and have no or very minimal counterparty risk since they are marked to market daily.

Forward contracts are customised agreements between parties to buy or sell a secuirty at an agreed price at a pre determined date. Forward contracts are not marked to market daily and have counterparty risk since they are not backed by an exchange.

Value of Forward Contract to Long Position at expiration = Spot Price - Forward Price

Option D) is the correct option since this is because the maintenance margins, intial margins in futures contract and the terms of the forward contract are not provided. Also, there is no information on the spot prices or the position in which the party is engaged in/

Option A) , Option B) and Option C) are incorrect because higher amounts cannot be determined in either contract because of no spot price or position in which the party is engaged in.