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CSEET · Economic and Business Environment · Indian Financial Markets

In the context of the Indian derivatives market, which of the following best describes a 'futures contract'?

A futures contract is a standardised, exchange-traded agreement to buy or sell an underlying asset at a predetermined price on a specified future date. Both parties are obligated to perform, unlike options, and standardisation distinguishes it from privately negotiated forward contracts.

  1. AA standardised contract traded on an exchange to buy or sell an underlying asset at a predetermined price on a specified future dateCorrect
  2. BA privately negotiated agreement settled only on the date the parties choose, with no exchange involvement
  3. CA contract giving only the buyer a right, but no obligation, to buy a security at any time without a premium
  4. DA loan agreement under which a bank lends securities to a broker for a fixed interest

Explanation

A futures contract is standardised and exchange-traded, and both parties are obliged to transact at the agreed price on the specified future date. The privately negotiated, customised version describes a forward contract. The right-without-obligation feature belongs to options and requires a premium.

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