61. A futures contract is a type of derivative instrument, or financial contract
ID: 2782401 • Letter: 6
Question
61. A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. T or F
62. Futures are used as financial instruments by not only producers and consumers but also speculators. These three form the necessary triad for the futures market. T or F
63. Forward contracts are the direct result of today's futures contracts. T or F
64. Today's futures market is a global marketplace for not only agricultural goods, but also for currencies and financial instruments. T or F
65. Because of modern technology, commodities prices can be seen throughout the world, so a Kansas farmer can match a bid from a buyer in Europe. T or F
66. _______ is sometimes called the deposit, the margin represents security to cover any loss in the market value of the contract that may result from adverse price changes. This is the cost of trading in the futures market.
Explanation / Answer
61 & 62. Both True; If you buy a futures contract, you are basically agreeing to buy something that a seller has not yet produced for a set price. But participating in the futures market does not necessarily mean that you will be responsible for receiving or delivering large inventories of physical commodities - remember, buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculate rather than to exchange physical goods (which is the primary activity of the cash/spot market). That is why futures are used as financial instruments by not only producers and consumers but also speculators.
63. False; The fundamental difference between futures and forwards is that futures are traded on exchanges and forwards trade OTC
64. True; currencies and interest rates along with stocks are also used in future contracts
65. True
66. Collateral
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