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Basic Question 13 of 18
Which is the only type of commodity where trading in forward contracts is larger than trading in future contracts?
B. Foreign currency
C. Interest rates
A. Agriculture
B. Foreign currency
C. Interest rates
User Contributed Comments 3
| User | Comment |
|---|---|
| gill15 | No idea what this means... |
| robbiecow | Forward contracts aren't standardized so this means that companies can customize the transaction i.e., flexibility to create terms as needed. Think of any 2 US companies with subsidiaries or locations abroad. These two companies will have different cash flows in their international operations. Now imagine they need to convert these cash flows which are denominated in local currency into USD. Because exchange rates fluctuate these companies might want to hedge against this risk by entering into a contract that locks in a certain exchange rate, but because their cash flows differ from each other and can also differ from period to period having a futures contract (i.e., a standardized contract) is inefficient and can be uneconomical; therefore, they would enter into a froward contract (i.e., customizable contract). |
| cy166099 | thank you robbiecow |
Thanks again for your wonderful site ... it definitely made the difference.
Craig Baugh
Learning Outcome Statements
describe classifications of assets and markets
describe the major types of securities, currencies, contracts, commodities, and real assets that trade in organized markets, including their distinguishing characteristics and major subtypes
CFA® 2024 Level I Curriculum, Volume 3, Module 1.