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Problem 2.
First and foremost, futures contracts are standardized in a way that there exists a
centralized futures exchange, where buyer and seller trade futures – contracts of
commodities. This centralized exchange defines contract size; specifically provides on
what asset is to be traded; its quality; how, where, when this asset is to be delivered; in
which currency it is traded and so forth.
The main advantage of such standartization is liquidity that appears, because many
traders concentrate on a same small pool of contracts. It becomes easy for a seller or a
buyer to find many traders for a desirable sale or purchase. In addition, futures positions
can be easily liquidated through a broker without the involvement with the other party to
the contract. Risks are minimized , because the exchange guarantees the performance of
each party to the contract.
Problem 3.
The first difference between futures and forwards contracts lies in standardization.
While futures contracts are standardized, forward contracts are private agreements that
allow for a certain degree of flexibility in their stated terms and conditions.
The second difference is that forward contracts are subjected to credit, while futures
contracts are not due to the fact that a standartized exchange guarantees against default risk
by taking both sides of the trade and marking to market their positions daily.
The third difference lies in regulation. While futures contracts are regulated at a
government level, forward contracts are substantially unregulated. The regulation of
futures contracts implies that transactions are reported promptly and that the market
participants do not manipulate with the contracts in any manner.
The fourth difference is that there are no cash flows until delivery in a forward
contract, while in a futures contract there exists margin requirements as well as margin
