Chapter 17, Problem 7PS

Summary Introduction

To determine:

Difference in flow of cash between entering a short futures position and short selling an asset

Introduction:

Future contract refers to the financial contract which is standardized in nature and is made between two parties wherein one party provide consent to sell or purchase the commodity at a particular date in the future and at a particular price to the other party which provide consent to purchase or sell the same. In the futures contract the physical delivery of the commodity does not take place.

Short sell refers to the arrangement wherein the asset is sold by the investor for which he does not have the ownership. The investor makes the sale first and then purchase the stock when the price of the same falls. This arrangement provide benefit to the investor only when there is a fall in the price of stock.