Sorry, if I am posting basic questions on futures but I have a hard time understanding it. Any help is appreciated. Standardization features of futures contracts do not include the: A) quality of the good that can be delivered. B) delivery time. C) quantity of the good to be delivered. D) delivery price of the commodity.
A?
No, as per schweser, The correct answer was D) delivery price of the commodity. The delivery, or spot price at contract expiration, of a commodity is a variable and cannot be included in a futures contract. Quality, quantity, and delivery time are all part of the standardized terms of a futures contract. But my understanding was that buyer and seller decide a price at which the asset will be delivered in future. So isn’t delivery price included?
When they say standardization, does it mean features of the contract decided by the exchange as opposed to the price which is decided by the buyer and seller? I would go with D as well.
D. The buyer and the seller decides the price. Thats why its not std. The exch. decide the qty. eg. 1000, 2000, 3000 bushels etc.
tricky question, you will see many like this one on exam day…
You might – but isint derivatives worth just 5% on level 1?
why do you say this is a trick? I saw this as straight forward. Just remember that the exchange sets everything except price. Therefore even if they toss in one you are not sure about …price has to be the answer.
Price is determined by the market. Remember that we’re talking of futures here. These are not stock options where the exercise price structure is dictated by the exchanges. In fact, when an account gets marked to market, it’s as if a new futures position is created at a new price. Some common sense could help you through the question as well: a) why would you not standardize the quality of the commodity (then again, think of the last term: when you refer to something as a “commodity,” you’re basically talking about something that’s ubiquitous and non-differentiable); b) and c) should be givens for you; d) how can prices on the one hand be dictated by the free market but on the other hand be set by the exchanges? Good question though.