What key risks associated with forward contracts do futures contracts aim to mitigate?

Liquidity risk, Default risk, Regulatory risk, Rigidity of the structure Market risk, Credit risk, Operational risk, Legal risk Inflation risk, Interest rate risk, Currency risk, Political risk Technological risk, Environmental risk, Social risk, Governance risk

How does the 'core transactional structure' of futures contracts compare to that of forwards contracts?

They are entirely different, serving distinct purposes Futures contracts solely focus on risk mitigation, while forwards prioritize profit They share the same fundamental objective of capitalizing on asset price movements Futures contracts are more complex and involve multiple asset classes, unlike forwards

What is the role of an 'exchange' in the context of futures contracts?

It acts as a regulatory body overseeing contract compliance It facilitates the trading of futures contracts by connecting buyers and sellers It determines the pricing and valuation of futures contracts It provides insurance against potential losses in futures trading

How do futures contracts address the challenge of finding a counterparty, a common issue with forwards contracts?

They rely on a centralized network of participants willing to take opposite positions They utilize advanced algorithms to match compatible traders They offer guaranteed counterparty participation through government backing They eliminate the need for a counterparty by directly linking to the underlying asset

What is meant by the statement that 'Futures Contract mimics the underlying'?

The futures contract's price closely tracks the price movements of the underlying asset The futures contract replicates the physical characteristics of the underlying asset The futures contract grants ownership rights to the underlying asset The futures contract has the same risk profile as the underlying asset

How do futures contracts differ from forwards contracts in terms of customization?

Futures contracts offer greater flexibility and allow for tailored terms Forwards contracts are standardized, while futures contracts can be customized Both futures and forwards contracts are standardized with predetermined terms Customization is not applicable to either futures or forwards contracts

What is the primary function of 'margin' in futures trading?

It acts as a performance bond ensuring parties fulfill their contractual obligations It represents the initial investment required to enter a futures contract It serves as collateral to cover potential losses exceeding the margin amount It is a fee charged by brokers for facilitating futures transactions

What happens to a futures contract upon reaching its 'expiry date'?

It automatically renews for an extended period It converts into a forwards contract with similar terms It ceases to exist, and a new contract with a different expiry date is introduced It becomes eligible for physical settlement of the underlying asset

How is the 'contract value' of a futures agreement typically calculated?

Lot size multiplied by the Futures price Futures price divided by the Lot size Lot size plus the Futures price Futures price minus the Lot size

What is the key distinction between 'spot price' and 'futures price'?

Spot price reflects the current market value of an asset, while futures price represents its anticipated value at a future date Spot price applies to physical assets, while futures price pertains to financial instruments Spot price involves immediate settlement, while futures price entails deferred settlement Spot price is determined by supply and demand, while futures price is set by the exchange