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Unit 4: Future Contracts

Currency future: Currency future is the price of a particular currency for settlement at a specified Notes
future date.
Mark to Market: The accounting act of recording the price or value of a security, portfolio or
account to reflect its current market value rather than its book value.
Offset: Elimination or reduction of a current long or short position by making an opposite
transaction of the same security.
Portfolio: The group of assets - such as stocks, bonds and mutual funds - held by an investor.

4.8 Review Questions

1. What is a futures contract? Explain with examples. Also discuss the types of financial
futures contracts.
2. Discuss the types of traders in futures markets with suitable examples.
3. Bring out the difference between a long futures position and short futures position. Illustrate
the same with an example.
4. Discuss the statement 'The basic function of futures contract is hedging'.
5. Define futures contract and explain its uses.

6. Discuss the process of marking-to-market used in futures trading.
7. Briefly highlight on the various methods of settling future contracts.
8. Compare and contrast between forward contracts and futures contracts with suitable
examples.
9. The payoff for a person who buys a futures contract is similar to the payoff for a person
who holds an asset. Discuss with suitable example.

10. If the index goes down, his futures position starts making profit. If the index rises, his
futures start showing losses. Discuss.

Answers: Self Assessment

1. Futures 2. Delivery
3. Organized exchanges 4. Margins

5. Short, long 6. Stock index
7. International Monetary Market (IMM) 8. Cash index
9. True 10. False
11. True 12. False

13. True 14. Physical
15. Stock indices 16. Reverse

4.9 Further Readings

Books Apte, P.G., International Financial Management, Tata McGraw-Hill Publishing

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