Commodity Forward Contracts Differ from Financial Forwards in the Following

question 1

Multiple Choice

Commodity forward contracts differ from financial forwards in the following manner:

• A) The underlying asset in a commodity forward is an asset that may be used in production and that gets consumed in the process.
• B) Commodity forwards are always more costly than financial forwards when the spot assets have the same prices.
• C) Commodity forwards have physical delivery whereas financial forwards have cash delivery.
• D) Commodity forwards do not have inconvenience yields whereas financial forwards do.

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Definitions:

Break-Even Point

The point at which the amount of goods produced or sold results in revenues that are exactly equal to the costs, leading to no profit or loss.

Contribution Margin Ratio

The percentage of revenue remaining after deducting variable costs, indicating how much revenue contributes towards covering fixed costs and generating profit.

Variable Costs

Expenses that fluctuate with the level of production output, such as raw materials and direct labor.

Fixed Costs

Expenses that remain constant in total amount irrespective of fluctuations in the activity level of a business, e.g., insurance premiums.