Why are most futures positions closed out through a reversing trade rather than held to delivery?
Lets first understand what is a future and a forward contract.
Forward contract is an instrument by which two parties agree to buy or to sell an asset at a specified future date and specified price. It is different from Future contract because it is non standardised whereas Future has standardized features and is traded on exchanges.
This is one of the main reason why future contracts are not held till delivery because futures are standardized and rarely correspond to what traders actually want.
Why are most futures positions closed out through a reversing trade rather than held to delivery?
Why use a forwards contract rather than a futures contract?
Which of the following is true about the futures contract? i. they trade in the over the counter market ii. they are settled daily iii. they are subject to default risk iv. a margin deposit is required for both long and short positions v. a contract specifies a range of delivery dates (rather than a single date) Choices: multiple of the choice might be correct
Multinational Limited previously sold a three-year Treasury bond futures contract on the ASX Trade 24 and now wishes to close out its open position on the delivery date. Which of the following statements relating to the closing out of a futures position is not correct? Multiple Choice A new ‘buy’ contract must have the same delivery date as the original ‘sell’ contract. The company may choose to deliver the specified Treasury bonds in settlement. The clearing-house acts as counterparty to...
1. What would happen if your long (or short) futures contracts weren’t closed out automatically for you at the end of the month (at the delivery date)? 2. What is the profit (or loss) generated on a position that is long 5 contracts @ $80.00, when the price of crude falls to $75.00? 3. If there was an increase of 5 million barrels of crude in storage for a particular week, why is the price reaction different given an expectation...
Is it typical that you get invoiced with each delivery rather than the supplier waiting until the entire order quantity is filled? State a “yes” or “no” and then explain why.
Explain why, in most cases, a seller recognizes revenue when it delivers its goods rather than when it produces the goods.
Provide economic explanations for the following: 1.Why is most productive activity carried out by firms rather than by individuals who contract mutually with one another? 2. What influences the boundaries of the firm? 3. As islands of centralized planning, how do firms deal with Hayek’s knowledge problem critique of attempts to centrally plan economic activity? 4. Explain the problems of monitoring and metering employee productivity. How do firms overcome these issues?
b. In practice, most derivative transactions end with cash settlement instead of physical delivery. Briefly explain what is meant by "cash settlement". Provide TWO (2) reasons why cash settlement is typically preferred over physical delivery (3+4-7 marks) c. Some scholars are of the opinion that futures contracts are not permissible from a Shari ah point of view, arguing that the futures contract contain excessive uncertainty or gharar. Provide TWO (2) counterarguments that have been used by other scholars who advocate...
why is the hot fluid often put on the tube side rather than the shell side? Is there any reason you may want to pass a cold fluid through the tubes rather than the shell? (This is a shell and tube heat exchanger question)
A) Why do Floridians buy their potatoes form Idahoans rather than produce potatoes themselves? B) Explain the connection between Markets, Specialization, and Trade.