Podcast
Questions and Answers
What does the futures contract obligate Ramu to do?
What does the futures contract obligate Ramu to do?
In the event of mad cow disease outbreak, who experiences a potential loss as described in the text?
In the event of mad cow disease outbreak, who experiences a potential loss as described in the text?
How can the investor limit potential losses due to a drop in market price?
How can the investor limit potential losses due to a drop in market price?
What is the primary reason for Ramu entering into a futures contract?
What is the primary reason for Ramu entering into a futures contract?
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How does the investor benefit if the market price of cows soars?
How does the investor benefit if the market price of cows soars?
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What is the purpose of the stop-loss agreement mentioned in the text?
What is the purpose of the stop-loss agreement mentioned in the text?
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Which of the following is a key difference between OTC derivatives and ETD derivatives?
Which of the following is a key difference between OTC derivatives and ETD derivatives?
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What is a characteristic of OTC derivatives according to the text?
What is a characteristic of OTC derivatives according to the text?
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Which statement accurately describes ETD derivatives?
Which statement accurately describes ETD derivatives?
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What makes counterparty risk a major concern in OTC derivatives?
What makes counterparty risk a major concern in OTC derivatives?
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Why are ETD derivatives considered to have reduced counterparty risk compared to OTC derivatives?
Why are ETD derivatives considered to have reduced counterparty risk compared to OTC derivatives?
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What is the key difference between over-the-counter (OTC) and exchange-traded (ETD) derivatives?
What is the key difference between over-the-counter (OTC) and exchange-traded (ETD) derivatives?
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Which type of derivative is more customizable in terms of contract terms and specifications?
Which type of derivative is more customizable in terms of contract terms and specifications?
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In the context of risk management, which type of investor would typically prefer over-the-counter (OTC) derivatives over exchange-traded (ETD) derivatives?
In the context of risk management, which type of investor would typically prefer over-the-counter (OTC) derivatives over exchange-traded (ETD) derivatives?
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What is a potential drawback of exchange-traded (ETD) derivatives compared to over-the-counter (OTC) derivatives?
What is a potential drawback of exchange-traded (ETD) derivatives compared to over-the-counter (OTC) derivatives?
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Which statement accurately describes the role of clearinghouses in exchange-traded (ETD) derivatives?
Which statement accurately describes the role of clearinghouses in exchange-traded (ETD) derivatives?
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Study Notes
- Ramu, a farmer, has ten cows and plans to sell them in a year, with an investment of 300 rupees for their raising
- Ramu is concerned about potential loss if mad cow disease outbreaks, so he enters a futures contract with an investor's broker
- The futures contract obligates Ramu to sell his cows to the investor for 100 rupees each in a year, and the investor to buy them for 100 rupees
- If market price soars, the investor makes a profit of 100 rupees per cow, while Ramu profits from his investment in raising the cows
- If mad cow disease occurs and market price drops, the investor experiences a loss of up to 80 rupees per cow, but can limit losses with a stop-loss agreement.
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Description
Learn about futures contracts in a cattle farming context where Ramu, a farmer, hedges against potential losses due to market fluctuations like mad cow disease. Understand the dynamics of futures contracts and their impact on both farmer and investor.