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Basic Question 5 of 5
In order to benefit from the price discovery function of futures markets, one must ______.
B. sell futures
C. observe futures prices
A. buy futures
B. sell futures
C. observe futures prices
User Contributed Comments 8
| User | Comment |
|---|---|
| bobert | you really can't benefit at all by simply observing. If you observe futures prices, that is all you are doing. Where is the benefit? |
| thekapila | i believe he should do all of above...just observing and doing nothing..wht can be the benefit achieved.. |
| Farina | equity analysts use prices established in a futures market (e.g., oil) to make estimations on a companies medium term (i.e., 12 month) cost base. Equity analysts who cover oil firms normally use the longer-term futures contracts as an accurate indication, without having to be active market participants. Same goes for any other derivative market whether it be futures, FWDs etc, these prices touch most companies in some way, some of the time. |
| Farina | Sorry, to clarify the comment above, oil and/or fuel prices observed in a futures market would be a cost base for a logistics firm or an airway, but would be relatively accurate estimator of revenues for an oil firm. |
| magicchip | observing would benefit by giving an indication of market sentiment and direction at the open for example. I routinely short certain financials when the dow futures are substantially lower before open. |
| viannie | The question here is about 'Price Discovery'. So what is the meaning of price discovery? It is through observing the strike price of the underlying assets which has a strong relations with future prices of of the assets itself => so we can predict future prices of the assets thru' this observatory exercise. |
| To-be-CFA | Going long or short is not a pre-requisite of discovering future prices. You just gotta have an internet connection! |
| ankurwa10 | Excatly, To-be-CFA, if you don't have a skin in the game, nothing stops you from knowing where the prices will be anyway. No need to transact. |
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Learning Outcome Statements
describe benefits and risks of derivative instruments
CFA® 2024 Level I Curriculum, Volume 5, Module 3.