The Purpose of a Margin Account for a Futures Contract

question 44

Multiple Choice

The purpose of a margin account for a futures contract is to:

• A) guarantee a minimum margin of profit for the contract holder.
• B) allow futures traders to have more than one contract at once.
• C) provide a cushion for the exchange against defaults on the contract.
• D) hold interest payments until expiration.

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Definitions:

Crossover Rate

Crossover Rate is the point at which two or more investment alternatives have the same net present value, used in capital budgeting to compare the desirability of projects.

WACC

A firm’s capital expenses are determined through the Weighted Average Cost of Capital, which proportionally weighs each category of capital.

NPV

Net Present Value - a financial metric used to evaluate the profitability of an investment or project, taking into account the time value of money by discounting future cash flows.

Cash Flow

This refers to the movement of money into and out of a business, and is critical for assessing the liquidity and operational efficiency of the company.