Which of the following statements about futures are true:I. Futures is a standardised contract to buy or sell a specific commodity or financial instrument at a specific price at a predetermined future date;II. In Australia bonds futures are usually quoted at an index figure of 100 minus the yield so a dealer can follow a basic principle of buy low and sell high;III. Novation is the process to renew futures contracts when they fall due;IV. Standard delivery is more usual in futures markets.
Question
Which of the following statements about futures are true:I. Futures is a standardised contract to buy or sell a specific commodity or financial instrument at a specific price at a predetermined future date;II. In Australia bonds futures are usually quoted at an index figure of 100 minus the yield so a dealer can follow a basic principle of buy low and sell high;III. Novation is the process to renew futures contracts when they fall due;IV. Standard delivery is more usual in futures markets.
Solution 1
I. True - Futures are indeed standardized contracts to buy or sell a specific commodity or financial instrument at a predetermined price and date.
II. True - In Australia, bond futures are quoted at an index figure of 100 minus the yield. This allows dealers to follow the principle of buying low and selling high.
III. False - Novation is not the process to renew futures contracts when they fall due. Novation is a process in which the obligations under a contract are discharged, and new obligations are created in their place. In the context of futures, novation refers to the role of the clearing house in stepping into the middle of the contract, becoming the buyer to every seller and the seller to every buyer.
IV. True - Standard delivery is more common in futures markets. This means that the physical delivery of the underlying asset is the norm upon contract expiration. However, it's important to note that many futures contracts are closed out or rolled over before expiration, and physical delivery is actually relatively rare.
Solution 2
I. True - Futures are indeed standardized contracts to buy or sell a specific commodity or financial instrument at a predetermined price and date.
II. True - In Australia, bond futures are quoted at an index figure of 100 minus the yield. This allows dealers to follow the principle of buying low and selling high.
III. False - Novation is not the process to renew futures contracts when they fall due. Novation is a process in which the obligations under a contract are discharged, and new obligations are created in their place. In the context of futures, novation refers to the role of the clearing house in stepping into the middle of the contract, becoming the buyer to every seller and the seller to every buyer.
IV. True - Standard delivery is more common in futures markets. This means that the physical delivery of the underlying asset is the norm upon contract expiration. However, it's important to note that many futures contracts are closed out or rolled over before expiration, and physical delivery is actually relatively rare.
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