Question

8.         Currency forwards differ from currency futures because they have:             a)         daily marking to ma

8.         Currency forwards differ from currency futures because they have:

            a)         daily marking to market and basis risks

            b)         linear payoffs and no option price or premium

            c)         nonlinear payoffs and option price or premium

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Answer #1

Answer to Question 8 :

Currency forwards differ from currency futures because they have :

(c) Nonlinear payoffs and option price or premium

Reasoning :

Futures are exchange traded and Forwards are traded Over The Counter (OTC). Therefore futures have daily marking to market and basis risk. Forwards does'nt have marking to market. Therefore (a) is incorrect.

Futures contract has a linear payoffs and no option price or premium because in future contracts the price-movement in the underlying asset ( For eg Currency price movement ) translates directly into a contract value of the futures which is not the case in forward contracts. Therefore option (b) is also incorrect and option (c) is correct.

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