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    Question

    Following is/are the feature of Exchange traded

    contract: I.         It is highly customized II.         It has margin requirements III.         High liquidity IV.         There is no M-T-M
    A I, II and IV Correct Answer Incorrect Answer
    B II and IV Correct Answer Incorrect Answer
    C I and III Correct Answer Incorrect Answer
    D II and III Correct Answer Incorrect Answer

    Solution

    The exchange traded contracts like futures and options are standardized derivative products available for trading on the exchanges. While forwards and swaps are customized products as they are traded over the counter by the sellers and buyers. Due to the standardized nature of the contracts and existence of trading through the exchange as the counter party, the exchange traded contracts are highly liquid. An Exchange takes money upfront from the buyers & sellers called Margin Money. Futures margin is a good-faith deposit or an amount of capital one needs to deposit to trade in a futures contract. The margin is a down payment on the full contract value of a futures contract. Margin trading: Margin trading at its core is a risk management procedure. Since most of the contracts pertaining to exchange traded derivatives are highly leveraged, a margin procedure is required. It allows the investor to borrow money from the market and invest this borrowed money. Even though the derivatives market is highly speculative, the safety of the principal and interest of the borrowed money is guaranteed via margin trading. At first, the buyer i.e. the borrower puts up a small fraction of their own money called the initial margin. The trades are then marked to market (MTM) on a daily basis to reflect the price movement and margin call will be made in case the margin falls below the required limit.

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