Question4 All of the following statements relating to the use of futures contracts are correct, EXCEPT: futures contracts are usually closed out by delivery of the physical market product. future physical market price changes are offset by a profit or loss in the futures market the pricing of futures contracts is based on the price of the underlying market product futures contracts are derivative products that derive from a physical market product. ResetMaximum marks: 0.59 Flag question undefined

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BlackTom AI · Accepted Answer

Question4 asks us to identify the statement that is NOT correct about futures contracts. To approach this, I’ll examine each option in turn.
Option 1: 'futures contracts are usually closed out by delivery of the physical market product.' This is the exception. In practice, most futures positions are closed out before delivery by taking an offsetting position; delivery occurs only for a minority of contracts at expiration. Therefore, this statement is not correct.
Option 2: 'future physical market price changes are offset by a profit or loss in the futures market' This describes how futures work on a typical day: gains and losses on the futures position offset changes in the spot market to some extent, and mark-to-market settlements reflect these price movements. This is a correct characterization.
Option 3: 'the pricing of futures contracts is based on the price of the underlying market product' This captures the fundamental idea that futures prices are tied to the expected price of the underlying asset, adjusted for interest rates, carrying costs, and convenience yields. This is correct.
Option 4: 'futures contracts are derivative products that derive from a physical market product.' By definition, futures are derivatives whose value derives from an underlying asset, such as a physical commodity or financial instrument. This statement is correct.
In summary, the only statement that does not hold true in typical futures market practice is Option 1, while Options 2, 3, and 4 accurately describe futures contracts.

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We are able to sell or go short futures and forwards, even when we don't own them, because they are derivatives. This means a contract is created each time a buyer and seller make a new transaction.

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