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Derivatives Theory – Theory Questions

Theory Questions

1. Compare and contrast a forward contract with a futures contract.

2. Discuss the relative merits and disadvantages of hedging, speculation, and arbitrage. Which of these is good for the economy?

3. What are the limitations of forward markets?

4. “A futures contract is more advantageous than a forward contract”—do you agree? If so, why?

5. What are the essential components of a futures contract?

6. What is the fundamental difference between initial margin and a variation margin?

7. How is a futures contract settled?

8. What is meant by open interest? What does the movement of open interest indicate?

9. How is a futures contract priced?

10. What is meant by systematic and unsystematic risk?

11. Do you think that index futures are better than stock futures? If so, why?

12. Why does the margin call occur? What happens if the margin call is not met by the investor?

13. Trading in stock futures versus trading in index futures—which is more risky and why?

14. List the code for months during which the contracts expire.

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