Forward and futures contracts

The derivatives markets contain different types of contracts. Forward contracts, futures contracts, options, and swaps are some common types of derivatives contracts.

Based on your understanding of forward and futures contracts, identify the differences between the two:

	Forward Contracts	Futures Contracts
These are nonstandardized contracts to buy or sell an asset at a specific time in the future at a specified delivery price.
Because there is an organized market for these contracts, they are highly liquid.
The derivatives markets contain different types of contracts. Forward contracts, futures contracts, options, and swaps are some common types of derivatives contracts.

Which of the following are used to hedge against fluctuating interest rates, stock prices, and exchange rates?

Financial futures

Commodity futures

General Forge and Foundry Co. is planning to build a new production facility that will cost $10 million. It plans to finance this project with 10-year bonds that would carry a 7% interest rate if they were issued today. However, the company does not need the money for six months. Which of the following actions would hedge General Forge and Foundry Co. against an increase in interest rates?

Take a short position in interest rate futures

Take a long position in foreign exchange futures

Take a long position in interest rate futures

Take a short position in foreign exchange futures