Canadian Securities Course (CSC) Level 1 Practice Exam

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When is a cash-settled future used?

When physical delivery of assets is feasible
For commodities with easily deliverable goods
When futures are based on assets difficult to deliver
For long-term investment purposes

The correct answer is: When futures are based on assets difficult to deliver

A cash-settled future is utilized when the futures contract is based on assets that are difficult to physically deliver. In this scenario, instead of exchanging the actual underlying asset upon the contract's expiration, the difference between the contract price and the market price is settled in cash. This method is applied to financial instruments or assets that may not be easily deliverable physically, such as stock indices or interest rates. Options A, B, and D are not the correct choices because they do not accurately represent the typical circumstances when a cash-settled future would be used. The feasibility of physical delivery, the nature of the commodity, or the investment purpose do not directly determine the use of cash-settled futures.