1. Futures are marked to market while forwards are not. Explain.

Solutions

Expert Solution

Futures are exchange traded contracts which have daily settlement and they do not have counter party risks. They have daily settlement in the sense that if you have a futures contract on stock with the settlement price of 100 which is fixed the current price of stock is 90 dollars then as per the guidelines you will be marked with a loss of $10 today when the market closes and not on the settlement date. Same applies for the profit is on the next day price is $110 .

Whereas forwards are traded over the counter and not on any exchange. There is no daily settlement and both the parties in the contract wait for the settlement date in future. So if you buy a contract to deliver $100 (current)w of asset in future at 110. You will not marked with any losses today until the settlement date happens and you have to deliver the asset.

I hope this makes sense.

Please hit the like button

Took real efforts

Thanks & Regards

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

True or False: Futures are customizable contracts while Forwards are not. True False

a) Explain a foreign currency futures contract and outline the differences between futures and forwards. b)...

a) Explain a foreign currency futures contract and outline the differences between futures and forwards. b) The Chicago Mercantile Exchange (CME) and the New York Board of Trade (NBOT) operate futures markets in currencies in the following pairs US$/pounds and US Dollar/Pound. The value standardize size of a sterling futures contract is 6,500 pounds. Describe how a UK company that expects to received US$800,000 in three months time can use a futures contract to hedge transaction exposure if the following...

Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards...

Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses? [6 marks]

Explain how forwards or futures can be used to manage risk. Provide an example of a...

Explain how forwards or futures can be used to manage risk. Provide an example of a hedge that uses a short futures position. Why might you chose to use a put option as a hedge instead of a short futures position?

When a comparison is made between futures and forwards contracts,it is said that futures are more...

When a comparison is made between futures and forwards contracts,it is said that futures are more liquid ,but forwards are more flexible.Explain the meaning of the statement and comment on how difference in contract liquidity and design flexibility might influence an investors preferences in choosing one instrument over the other.

How are forwards and/or futures used and what is an advantage and disadvantage of their use...

How are forwards and/or futures used and what is an advantage and disadvantage of their use from a company perspective. From an investor perspective? Discuss the importance of Forwards and Futures as they pertains to a MNC giving an example of its use. Do you support their use and why? Try to provide a real example.

Mention three pros and cons for each of the following derivatives 1. futures 2. forwards 3....

Mention three pros and cons for each of the following derivatives 1. futures 2. forwards 3. options

Options contracts are an alternative to futures and forwards contracts to hedge FX risk. Why would...

Options contracts are an alternative to futures and forwards contracts to hedge FX risk. Why would investors prefer to use options rather than futures or forwards? Under which future outcomes do options provide an advantage relative to forwards or futures contracts? Why might managers choose not to enter into options contracts?

An analyst comments that options are always better than forwards or futures given you have the...

An analyst comments that options are always better than forwards or futures given you have the right but not the obligation to exercise these. This implies that the payoff is bounded below by $0. In the case of forwards or futures you can face negative payoffs. Therefore, options will always be more profitable for the buyer. True or False and explains

What is the best financial derivative for a risk averse listed public company (forwards, options, futures,...

What is the best financial derivative for a risk averse listed public company (forwards, options, futures, swap)? Why?

Subjects