The main difference between a forward contract and a cash transaction is:
A)only the cash transaction creates an obligation to perform.
B)a forward is performed at a later date while the cash transaction is performed immediately.
C)only one involves a deliverable instrument.
D)neither allows for hedging.
E)None of the above.

Question

Quizplus · Accepted Answer

A forward contract is an agreement to buy or sell an underlying asset at a predetermined price on a future date, while a cash transaction is an immediate exchange of funds for the asset. Therefore, the main difference is the timing of the transaction. Option A is incorrect because both a forward contract and a cash transaction involve an obligation to perform. Option C is incorrect because both can involve deliverable instruments. Option D is incorrect because forward contracts are commonly used for hedging.

The Main Difference Between a Forward Contract and a Cash