Explanation:
The correct answer is C.
In the scenario of holding a gold futures contract in an exchange-traded derivatives market, closing the position typically involves executing a counter trade. This process is facilitated by the high liquidity of the market and the standardized nature of the contracts. The investor, in this case, would close their position by selling an equivalent gold futures contract. The presence of a large number of buyers and sellers in the market, along with uniform contract terms, makes this process relatively straightforward and efficient. The ease of closing positions is one of the key benefits of trading in such standardized and liquid markets.
A is incorrect because the investor does not need to find a specific buyer to take over the contract. Instead, they can close the position through a counter trade in the open market.
B is incorrect because while holding a position to maturity is a possible way to settle a futures contract, it is not typical for traders who wish to close their position prior to maturity. Instead, they would execute a counter trade to close their position.
D is incorrect because the exchange does not assume the position from the investor. The investor is responsible for executing a counter trade to close their position.
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Q.6120 In the context of exchange-traded derivatives, an investor holds a position in a gold futures contract. Considering the standardized nature of these contracts and the liquidity of the market, how does the process of closing this position typically work, and what are the key factors influencing this process?
A
Closing the position requires finding a specific buyer to directly take over the contract.
B
The position can be closed by holding it to maturity, at which point the contract is automatically settled.
C
The position is closed by executing a counter trade, facilitated by the market's liquidity and contract standardization.
D
Contract closure is typically managed by the exchange, which assumes the position from the investor.