The Structure of Futures Contracts as They Are Traded in Future

question 27

Multiple Choice

The structure of futures contracts as they are traded in future markets is best described in which of the following?

• A)All parties that trade in futures make a (relatively small) specific deposit before they enter into the contract.The contract is marked to market on a daily basis and gains on the contract are added to the deposit and losses are deducted.When the deposit reaches a minimum level a margin call will be made to require the trader to reinstate the original deposit.
• B)The purchaser of the futures contract is given a set price at which they can exercise the futures contract at or up to a specified date.If during that time or up to that date the buyer of the futures contract decides to exercise it, the buyer pays the exercise price and the seller of the contract agrees to deliver the item within a specified period of the exercise date.In the case of financial futures, they are often closed out before delivery is required.
• C)All buyers of futures contracts make a specific deposit that is held in trust by the other party to the contract.As the buyer makes gains, these are deducted from the amount of deposit held by the seller.As the seller makes gains on the contract, the buyer is required to increase the deposit to maintain the same percentage value of deposit.At the delivery date on the contract the deposit has already accumulated the gains and losses and all that is required is for the seller to deliver on the contract.In the case of financial futures, they are often closed out before delivery is required.
• D)A futures contract contains an agreement to buy and sell a specified item or financial asset or index at a future date and at an agreed price.The parties to the contract are not required to make any financial commitment at the beginning of the contract, hence futures contracts are considered highly levered and risky for speculation purposes.The buyer pays the agreed sum on delivery by the seller or the contract is closed out before the delivery date.

---

Definitions:

Dividend Payment

A dividend payment is a distribution of a portion of a company's earnings to its shareholders, typically made in cash or additional stock.

Journal Entry

The accounting method for expressing the effects of a transaction on accounts in a debits-equal-credits format.

Noncumulative

Noncumulative refers to dividends on preferred stock that, if not declared or paid in a given period, do not accumulate and are not owed to shareholders in future periods.