A Speculator Will Often Prefer to Buy a Futures Contract

question 28

Multiple Choice

A speculator will often prefer to buy a futures contract rather than the underlying asset because:
I. Gains in futures contracts can be larger due to leverage.
II. Transaction costs in futures are typically lower than those in spot markets.
III. Futures markets are often more liquid than the markets of the underlying commodities.

• A) I and II only
• B) II and III only
• C) I and III only
• D) I, II, and III

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Definitions:

Net Cash Flows

The difference between the cash inflows and outflows in a company during a specific period, reflecting the company’s overall liquidity position.

Estimated Cost

An approximation of the cost to complete a project, task, or transaction, made in the absence of full information.

Capital Investment Evaluation

The process of assessing the profitability and risk of proposed investments or projects to make informed decisions about capital allocations.

Strengths and Weaknesses

An analysis or assessment of the positive (strengths) and negative (weaknesses) internal aspects of an organization.