Finance Assignment Paper on Finance Tests

Finance Tests

Daily Volatility

Given that the standard deviation is 1% and the mean of the normally distributed returns is zero, then the annual volatility can be calculated as follows.

Where σTis the annual volatility, σ the standard deviation and T the numbers of days in one year.

1% * √256= 16%

This is multiplied by the expected value of the variations:

16% * √(2/π) = 12.768%

This is then divided by √256 to give the daily volatility

12.768%  / (√256) = 0.798%

Difference Between A Forward Contract And Futures Contract

            A forward contract entails an agreement made between two private parties where they agree to trade an asset at a time and price in the future that has been agreed upon. The forward contracts are private in nature and are not sold on the exchange (Diffen.com par 1). Instead, they are traded over the counter.  Futures contracts are a standardized form of forward contracts that are presented to the buyers on a futures exchange. In a manner similar to the forward contracts, the futures contract comprise of an agreement on price and time that the asset is to be traded in the future. Often times, the assets consist of bonds, stocks or commodities such as gold (Diffen.com par 3).

            The major distinguishing factor between the futures contracts and forward contracts is the fact that the forward contracts are traded privately whereas the future contracts are traded publicly on the exchange (Diffen.com par 4). Other differences include the fact that the forward contracts are customized to meet the needs of the customer, without a need for an initial payment. In contrast, the futures contracts are standardized, with an initial margin payment being required (Diffen.com par 5). One of the primary purpose of forward contract is hedging while the future contracts are used for speculation.

Works cited

Diffen.com,. ‘Forward Contract Vs Futures Contract – Difference And Comparison | Diffen’. N.p., 2012. Web. 23 Sept. 2014.