Which of the following best describes the risks associated with futures contracts?Question 10Select one:a.The variability of changing prices and costs associated with buying and selling futures contractsb.The possibility of making an unexpected profit on a futures contractc.The probability of making a loss, or a fall in the value of a futures contractd.The possibility of loss associated with the default by the holder of the opposite position in the contract
Question
Which of the following best describes the risks associated with futures contracts?Question 10Select one:a.The variability of changing prices and costs associated with buying and selling futures contractsb.The possibility of making an unexpected profit on a futures contractc.The probability of making a loss, or a fall in the value of a futures contractd.The possibility of loss associated with the default by the holder of the opposite position in the contract
Solution
The best description of the risks associated with futures contracts is both a. The variability of changing prices and costs associated with buying and selling futures contracts and d. The possibility of loss associated with the default by the holder of the opposite position in the contract.
Futures contracts are inherently risky because they are based on predictions of future prices. If the actual future price is different from the price specified in the contract, one party will lose money. This is the risk described in option a.
Option d describes the risk of counterparty default. This is the risk that the other party in the contract will not fulfill their obligation to buy or sell the asset at the agreed upon price. This can result in a loss for the party that is left holding the contract.
Option b is not a risk, but rather a potential benefit of futures contracts. While it is possible to make an unexpected profit, this is not a risk associated with futures contracts.
Option c is a potential outcome, not a risk. The probability of making a loss is a result of the risks described in options a and d, not a risk in itself.
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