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.

Question

BlackTom AI · Accepted Answer

This statement concerns how futures and forwards operate as derivatives and how contracts are formed.
Option: True
First, recognizing that futures and forwards are indeed derivative instruments is key, because their value derives from the underlying asset rather than being the asset itself. This is why market participants can sell (go short) without owning the underlying asset; selling a contract obligates the seller to deliver or settle the asset at a later date, depending on the contract terms.
Next, the assertion that a contract is created each time a buyer and seller make a new transaction aligns with how these markets function: a new agreement specifying the asset, quantity, price, and settlement date is established between the counterparties at the time of the trade. In futures markets, this contract is standardized and cleared through a clearinghouse, which helps manage obligations and margin requirements. In forwards markets, contracts are typically bespoke but still create a binding agreement for future delivery or settlement.
A helpful nuance is to distinguish the types of creation: for futures, standard contracts are created and traded on exchanges with central clearing; for forwards, contracts are privately negotiated but still result in a binding agreement for those terms. The core idea—short selling and futures/forwards relief from needing to own the asset, and the existence of a contractual agreement for each trade—supports the statement.
If we consider potential misconceptions, some might think that every trade creates a new, unique contract in all cases or that ownership is required to short-sell; both are incorrect. Short selling via derivatives does not require owning the asset, and while forwards are private, each trade still produces a definitive contract with specified terms.
In summary, the claim that we can sell or go short a futures or forwards contract without owning the asset because they are derivatives, and that a contract is created for each new buyer-seller transaction, is consistent with market structure and contract mechanics.

fin_412_120258_251367 Test 1 in class

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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Similar Questions

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fin_412_120258_251367 Test 1 in class

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.

View Explanation

Log in for full answers

Similar Questions

From a financial standpoint, futures are virtually identical to forwards

The main difference between forward and futures contracts is that:

Part 1Financial instruments with returns tied to previously issued securities are​ called:Part 2 A. financial derivatives B. reversible bonds C. hedge securities D. convertible bonds

Which market involves the trading of derivative securities?

Which of the following is a hedging instrument? _____

The spot market is where securities are sold for cash and delivered immediately, whereas forward markets (or derivative markets) the delivery date is different from the negotiation date.

The spot market is where securities are sold for cash and delivered immediately, whereas forward markets (or derivative markets) the delivery date is different from the negotiation date.

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Part 1Financial instruments with returns tied to previously issued securities are called:Part 2 A. financial derivatives B. reversible bonds C. hedge securities D. convertible bonds