Which instrument is designed to discover prices for a future time period rather than for immediate delivery?

Which instrument is designed to discover prices for a future time period rather than for immediate delivery?

• A. Forward contract
• B. Spot contract
• C. Futures contract
• D. Swap

Answer: (C)

Futures contracts are designed to reveal what the market expects the price of an asset to be at a specific future time. Because they are standardized, traded on an exchange, and have high liquidity with many participants (hedgers, speculators, arbitrageurs), the ongoing buying and selling quickly reflect new information and expectations about future supply, demand, and other factors. The daily mark-to-market settlement also means prices adjust as new information arrives, keeping the futures price a timely signal of the anticipated future price. In contrast, a forward is privately negotiated and tailored, so it lacks the broad, transparent price discovery of the public futures market; a spot contract deals with immediate delivery at today’s price; and a swap focuses on exchanging cash flows over time rather than establishing a market price for a future date.

Futures contracts are designed to reveal what the market expects the price of an asset to be at a specific future time. Because they are standardized, traded on an exchange, and have high liquidity with many participants (hedgers, speculators, arbitrageurs), the ongoing buying and selling quickly reflect new information and expectations about future supply, demand, and other factors. The daily mark-to-market settlement also means prices adjust as new information arrives, keeping the futures price a timely signal of the anticipated future price. In contrast, a forward is privately negotiated and tailored, so it lacks the broad, transparent price discovery of the public futures market; a spot contract deals with immediate delivery at today’s price; and a swap focuses on exchanging cash flows over time rather than establishing a market price for a future date.