Question

Why did the ETF invest in the Futures and not the Spot Market for gold?

Why did the ETF invest in the Futures and not the Spot Market for gold?

Homework Answers

Answer #1

Futures investment is preferred over spot market gold purchase for the following reasons:

*Spot market transactions require taking delivery of the physical commodity--here gold. In the case of futures, no handling of physical gold is necessary. Hence, all risks and incoveniences associated with a costly commodity like gold is avoided.

*In the spot market, payment has to be made upfront. For futures only the initial margin need be paid, though periodic margin calls may be required. But still the investment is very much lower.

*The transactions costs would be lower.

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