ACCA Financial Management (F9) Certification Practice Exam

What defines a Futures contract?

1. An agreement for immediate exchange of assets

2. A guarantee from a bank on corporate bonds

3. Contracts to buy or sell an asset on a specific future date at an agreed price

4. Short-term loans secured by financial instruments

The correct answer is: Contracts to buy or sell an asset on a specific future date at an agreed price

A Futures contract is fundamentally characterized by its nature of being a legally binding agreement to buy or sell a particular asset at a predetermined price at a specified date in the future. This definition encompasses the essential features of Futures contracts, which are typically used in financial markets to hedge against price fluctuations or to speculate on future price movements of assets such as commodities, currencies, or financial instruments. These contracts are standardized and traded on exchanges, providing both parties with the obligation to fulfill the contract at expiration. This distinctive aspect contrasts with spot contracts, which involve the immediate exchange of assets. Futures contracts facilitate strategic financial planning and risk management by allowing traders to lock in prices ahead of time, which helps in managing potential volatility in asset prices over time. Other options presented do not align with the fundamental characteristics of Futures. For instance, the immediate exchange of assets pertains more to spot contracts rather than Futures contracts, and bank guarantees on corporate bonds do not define the structure of a Futures contract. Similarly, short-term loans secured by financial instruments do not encapsulate the defining features of a Futures contract, which centers around future transactions and price agreements.