Financial Risk Manager Part 1
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A risk manager working at an investment firm is conducting an analysis on the forward and futures contracts that the firm's clients employ for hedging activities. The scope of the analysis includes a comparison of the pricing mechanisms for both types of contracts, the methods used to compute their respective profits and losses, and the strategies employed to either offset or fulfill the contractual obligations. Which of the following statements is true?
A risk manager working at an investment firm is conducting an analysis on the forward and futures contracts that the firm's clients employ for hedging activities. The scope of the analysis includes a comparison of the pricing mechanisms for both types of contracts, the methods used to compute their respective profits and losses, and the strategies employed to either offset or fulfill the contractual obligations. Which of the following statements is true?
Explanation:
C is correct. Due to the daily settlement feature of futures contracts, the profit and loss of forward and futures contracts will differ. The futures contract realizes the entire daily profit or loss on the day it occurs, while the profit or loss on the forward contract is discounted over the time remaining to maturity.