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Solution Manual For Fundamentals of Financial Management, 15th Edition

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    Contents iii Solution Manual Contents Preface Alternative Formats for the Introductory Course v Cont ents of the Instructor’s Manual v Integrated Cases v PowerPoint Slide Show vi Comprehensive/ Spreadsheet Problems vii Chapter Spreadsheet Models vii Textbook Companion Website vii Test Bank viii MindTap viii Ordering Ancillary Materials viii Conclusion i x Sample Course Syllabus x Course Schedule x i v Answers to End - of - Chapter Problems xvi Chapter 1 An Overv iew of Financial Management 1 Chapter 2 Financial Markets and Institutions 7 Chapter 3 Financial Statements, Cash Flow, and Taxes 2 3 Chapter 4 Analysis of Financial Statements 4 9 Chapter 5 Time Value of Money 81 Chapter 6 Interest Rates 1 2 5 Chapter 7 Bonds and Their Valuation 1 5 1 Chapter 8 Risk and Rates of Return 1 8 9 Chapter 9 Stocks and Their Valuation 2 2 5 Chapter 10 The Cost of Capital 2 5 7 Chapter 11 The Basics of Capital Budgeting 2 7 9 Chapter 12 Cash Flow Estimation and Risk Analysis 3 19

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    iv Contents Chapter 1 3 Real Options and Other Topics in Capital Budgeting 3 67 Chapter 1 4 Capital Structure and Leverage 3 85 Chapter 1 5 Distributions to Shareholders: Dividends and Share Repurchases 4 21 Chapter 1 6 Working Capital Management 4 47 Chapter 1 7 Financi al Planning and Forecasting 4 75 Chapter 1 8 Derivatives and Risk Management 4 99 Chapter 1 9 Multina tional Financial Management 5 25 Chapter 20 Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles 5 5 3 Chapter 2 1 Mergers and Acquisitions 5 83

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    Chapter 1 : An Overview of Financial Management Learning Objectives 1 Chapter 1 An Overview of Financial Management Learning Objectives After reading this chapter, students should be able to do the following : ◆ Explain the role of finance and the different types of jobs in finance. ◆ Identify the advantages and disadvantages of different forms of business organization. ◆ Explain the links between stock price, intrinsic value , and executive compensation. ◆ Identify the potential conflicts that arise within the firm between stockholders and managers and between stockholders and bondholders , and discuss the techniques that firms can use to mitigate these potential conflicts. ◆ Discuss the importance of business ethics and the consequences of unethical behavior.

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    2 Lecture Suggestions Chapter 1 : An Overview of Financial Management Lecture Suggestions Chapter 1 covers some important concepts, and discussing them in class can be interesting. However, students can read the chapter on their own, so it can be assigned but not covered in class. We spend the first day going over the syllabus and discussing grading and other mechanics relating to the course. To the extent that time permits, we talk about the topics that will be covered in the course and the structure of the book. We also discuss briefly the fact that it is assumed that managers try to maximize stock prices, but that they may have other goals, hence that it is useful to tie executive compensation to stockholder - oriented performance measures. If time permits, we think it ’ s worthwhile to spend at least a full day on the chapter. If not, we ask students to read it on their own, and to keep them honest, we ask one or two questions about the material on the first exam. One point we emphasize in the first class is that students should print a copy of the PowerPoint slides for each chapter covered and purchase a financial calculator immediately, and bring both to class regularly. We also put copies of the various versions of our “ Brief Calculator Manual, ” which in about 12 pages explains how to use the most popular calculators, in the copy center. Students will need to learn how to use their calculators before time value of money c oncepts are covered in Chapter 5 . It is important for students to grasp these concepts early as many of the remaining chapters build on the TVM concepts. We are often asked what calculator students should buy. If they already have a financial calculator that can find IRRs, we tell them that it will do, but if they do not have one, we recommend either the HP - 10B II + or 17B II + . Please see the “ Lecture Suggestions ” for Chapter 5 for more on calculators. DAYS ON CHAPTER: 1 OF 5 6 DAYS (50 - minute periods)

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    Chapter 1: An Overview of Financial Management Answers and Solutions 3 Answers to End - of - Chapter Questions 1 - 1 A firm ’ s intrinsic value is an estimate of a stock ’ s “ true ” value based on accurate risk and return data. It can be estimated but not measured precisely. A stock ’ s current price is its market price — the value based on perceived but possibly incorrect information as seen by the marginal investor. From these definitions, you can see that a stock ’ s “ true ” long - run value is more closely related to its intrinsic value rather than its current price . 1 - 2 Equilibrium is the situation where the actual market price equals the intrinsic value, so investors are indifferent between buying and selling a stock. If a stock is in equilibrium then there is no fundamental imbalance, hence no pressure for a change in the stock ’ s price. At any given time, most stocks are reasonably close to their intrinsic values and thus are at or close to equilibrium. However, at times stock prices and equilibrium values are different, so stocks can be temporarily undervalued or overvalued . Investor optimism and pessimism, along with imperfect knowledge about the true intrinsic value, leads to deviations between the actual prices and intrinsic values. 1 - 3 If the three intrinsic value estimates for Stock X were different, you would have the most confidence in Company X ’ s CFO ’ s estimate. Intrinsic values are strictly estimates, and different analysts with different data and different views of the future will form different estimates of the intrinsic value for any given stock. However, a firm ’ s managers have the best information about the company ’ s future prospects, so managers ’ estimates of intrinsic value are generally better than the estimates of outside investors . 1 - 4 If a stock ’ s market price and intrinsic value are equal, then the stock is in equilibrium and there is no pressure (buying/selling) to change the stock ’ s price. So, theoretically, it is better that the two be equal; however, intrinsic value is a long - run concept. Management ’ s goal should be to maximize the firm ’ s intrinsic value, not its current price. So, maximizing the intrinsic value will maximize the average price over the long run but not necessarily the current price at each point in time. So, stockholders in general would probably expect the firm ’ s market price to be under the intrinsic value — realizing that if management is doing its job that current price at any point in time would not necessarily be maximized. However, the CEO would prefer that the market price be high — since it is the current price that he will receive when exercising his stock options. In addition, he will be retiring after exercising those options, so there will be no repercussions to him (with respect to his job) if the market price drops — unless he did something illegal during his tenure as CEO . 1 - 5 The board of directors should set CEO compensation dependent on how well the firm performs. The compensation package should be sufficient to attract and retain the CEO but not go beyond what is needed. Compensation should be structured so that the CEO is rewarded on the basis of the stock ’ s performance over the long run, not the stock ’ s price on an option exercise date. This means that options (or direct stock awards) should be phased in over a number of years so the CEO will have an incentive to keep the stock price high over time. If the intrinsic value could be measured in an objective and verifiable manner, then performance pay could be based on changes in intrinsic value. However, it is easier to measure the growth rate in reported profits than the intrinsic value, although reported profits can be manipulated through aggressive accounting procedures and intrinsic value cannot be manipulated. Since intrinsic value is not observable, compensation must be based on the stock ’ s market price — but the price used should be an average over time rather than on a sp ecific date .

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    4 Answers and Solutions Chapter 1 : An Overview of Financial Management 1 - 6 The different forms of business organization are proprietorship s , partnership s , corporation s, and limited liability corporations and partnerships . The advantages of the first two include the ease and low cost of formation. The advantages of corporation s include limited liability, indefinite life, ease of ownership transfer, and access to capital markets. Limited liability companies and partnerships have limi ted liability like corporations. The disadvantages of a proprietorship are (1) difficulty in obtaining large sums of capital; (2) unlimited personal liability for business debts; and (3) limited life. The disadvantages of a partnership are (1) unlimited liability, (2) limited life, (3) difficulty of transferring ownership, and (4) difficulty of raising large amounts of capital. The disadvantages of a corporation are (1) double taxation of earnings and (2) setting up a corporation and filing required state and federal reports, which are complex and time - consuming . Among t he disadvantage s of limited liability corporations and partnerships are difficulty in raising capita l and the complex ity of setting them up . 1 - 7 Stockholder wealth maximization is a long - run goal. Companies, and consequently the stockholders, prosper by man agement making decisions that will produce long - term earnings increases. Actions that are continually shortsighted often “ catch up ” with a firm and, as a result, it may find itself unable to compete effectively against its competitors. There has been much criticism in recent years that U.S. firms are too short - run profit - oriented. A prime example is the U.S. auto industry, which has been accused of continuing to build large “ gas guzzler ” automobiles because they had higher profit margins rather than retooling for smaller, more fuel - efficient models. 1 - 8 Useful motivational tools that will aid in aligning stockholders ’ and management ’ s interests include: (1) reasonable compensation packages, (2) direct intervention by shareholders, including firing managers who don ’ t perform well, and (3) the threat of takeover. The compensation package should be sufficient to attract and retain able managers but not go beyond what is needed. Also, compensation packages should be structured so that managers are rewarded on the basis of the stock ’ s performance over the long run, not the stock ’ s price on an option exercise date. This means that options (or direct stock awards) should be phased in over a number of years so managers will have an incentive to keep the stock price high over time. Since intrinsic value is not observable, compensation must be based on the stock ’ s market price — but the price used should be an average over time rather than on a sp ecific date. Stockholders can intervene directly with managers. Today, the majority of stock is owned by institutional investors and these institutional money managers have the clout to exercise considerable influence over firms ’ operations. First, they can talk with managers and make suggestions about how the business should be run. In effect, these institutional investors act as lobbyists for the body of stockholders. Second, any shareholder who has owned $2,000 of a company ’ s stock for one year can sponsor a proposal that must be voted on at the annual stockholders ’ meeting, even if management opposes the proposal. Although shareholder - sponsored proposals are non - binding, the results of such votes are clearly heard by top management. If a firm ’ s stock is undervalued, then corporate raiders will see it to be a bargain and will attempt to capture the firm in a hostile takeover. If the raid is successful, the target ’ s executives will almost certainly be fired. This situation gives managers a strong incentive to take actions to maximize their stock ’ s price . 1 - 9 a. Corporate philanthropy is always a sticky issue, but it can be justified in terms of helping to create a more attractive community that will make it easier to hire a productive work force. This corporate philanthropy could be received by stockholders negatively, especially those stockholders not living in its headquarters city. Stockholders are interested in actions that maximize share price, and if competing firms are not making similar contributions, the “ cost ” of this philanthr opy has to be borne by someone — the stockholders. Thus, stock price could decrease .

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    Chapter 1: An Overview of Financial Management Answers and Solutions 5 b. Companies must make investments in the current period in order to generate future cash flows. Stockholders should be aware of this, and assuming a correct analysis has been performed, they should react positively to the decision. The Chinese plant is in this category. Capital budgeti ng is covered in depth in Part 4 of the text. Assuming that the correct capital budgeting analysis has been made, the stock price should increase in the future . c. U.S . Treasury bonds are considered safe investments, while common stock s are far more risky. If the company were to switch the emergency funds from Treasury bonds to stocks, stockholders should see this as increasing the firm ’ s risk because stock returns are not guaranteed — sometimes they increase and sometimes they decline . The firm might need the funds when the prices of their investments were low and not have the needed emergency funds. Consequently, the firm ’ s stock price would probably fall . 1 - 10 a. No, TIAA - CREF is not an ordinary shareholder. Because it is one of the largest institutional shareholders in the United States and it controls more than 900 billion in pension funds, its voice carries a lot of weight. This “ shareholder ” in effect consists of many individual shareholders whose pensions are invested with this group . b . For TIAA - CREF to be effective in wielding its weight, it must act as a coordinated unit. In order to do this, the fund ’ s managers should solicit from the individual shareholders their “ votes ” on the fund ’ s practices, and from those “ votes ” act on the majority ’ s wishes. In so doing, the individual teachers whose pensions are invested in the fund have , in effect , determined the fund ’ s voting practices. 1 - 1 1 Earnings per share in the current year will decline due to the cost of the investment made in the current year and no significant performance impact in the short run. However, the company ’ s stock price should increase due to the significant cost savings expected in the future. 1 - 1 2 The board of directors should set CEO compensation dependent on how well the firm performs. The compensation package should be sufficient to attract and retain the CEO but not go beyond what is needed. Compensation should be structured so that the CEO is rewarded on the basis of the stock ’ s performance over the long run, not the stock ’ s price on an option exercise date. This means that options (or direct stock awards) should be phased in over a number of years so the CEO will have an incentive to keep the stock price high over time. If the intrinsic value could be measured in an objective and verifiable manner, then performance pay could be based on changes in intrinsic value. Since intrinsic value is not observable, compensation must be based on the stock ’ s market price — but the price used should be an average over time rather than on a sp ecific date. The board should probably set the CEO ’ s compensation as a mix between a fixed salary and stock options. The actions of the vice president of Company X would be different than if he were CEO of some other company . 1 - 1 3 Setti ng the compensation policy for three division managers would be different than setting the compensation policy for a CEO because performance of each of these managers could be more easily observed. For a CEO an award based on stock price performance makes sense, while basing the compensation for division managers on stock price performance doesn ’ t make sense. Each of the managers could still be given stock awards; however, rather than the award being based on stock price it could be determined from some observable measure like increase d gas output, oil output, etc. 1 - 14 a. The expected payoff to debtholders is $77 million. The expected payoff to stockholders is (0.5 × $13 million + 0.5 × $ 53 million) = $33 million. If management selects Project L, then the

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    6 Answers and Solutions Chapter 1 : An Overview of Financial Management firm will have enough cash flow to fully pay debtholders the promised $77 million, regardless of the state of the economy. The stockholders receive the cash flows that are available after the debtholders have been paid. b. The expected payoff to debtholders is (0.5 × $50 million + 0.5 × $77 million) = $6 3 .5 million. The expected payoff to stockholders is (0.5 × 0 + 0.5 × $93) = $46.5 million. If management selects Project H and the economy is weak, then the company will not have enough cash to fully pay off its debts. In this case, the debtholders would receive all of the available cash ($50 million) and there will be nothing left over for the stockholders. If the economy is strong, there will be enough cash to fully pay off the debtholders and the stockholders will receive all the remaining cash ($1 7 0 million – $77 million = $ 9 3 million). c. The bondholders would clearly prefer that the company select Project L, since it would give them a higher cash flow and less risk. d. Even though Project L and Project H have the same overall expected payoff, Project H shifts the distribution of the firm ’ s cash flow payoffs from debtholders to stockholders. So, in many instances, despite the higher risk, stockholders may prefer Project H because it provides them with a signific antly higher expected payoff. e. Bondholders attempt to protect themselves by including covenants in the bond agreements that limit firms ’ use of additional debt and constraining managers ’ actions (such as taking on risky projects to the detriment of bondholders) in other ways.

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    Chapter 2 : Financial Markets and Institutions Learning Objectives 7 Chapter 2 Financial Markets and Institutions Learning Objectives After reading this chapter, students should be able to do the following : ◆ Identify the different types of financial markets and financial institutions , and explain how these markets and institutions enhance capital allocation. ◆ Explain how the stock market operates , and list the distinctions between the different types of stock markets. ◆ Explain how the stock market has performed in recent years. ◆ Discuss the importance of market efficiency , and explain why some markets are more efficient than others. ◆ Develop a simple understanding of behavioral finance.

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    8 Lecture Suggestions Chapter 2 : Financial Markets and Institutions Lecture Suggestions Chapter 2 presents an overview of financial markets and institutions. S tudents definitely have an interest in financial markets and institutions. We base our lecture on the integrated case. The case goes systematically through the key points in the chapter, and within a context that helps students see the real world relevance of the material in the chapter. We ask the students to read the chapter, and also to “look over” the case before class. However, our class consists of about 1,000 students, many of whom view the lecture on TV, so we cannot count on them to prepare for class. For this reason, we designed our lectures to be useful to both prepared and unprepared students. Since we have easy access to computer projection equipment, we generally use the PowerPoint slides as the core of our lectures. We make the se slides available to our students, and we strongly suggest to our students that they print a copy of the PowerPoint slides for the chapter and bring it to class. This will provide them with a hard copy of our lecture, and they can take notes in the space provided. Students can then concentrate on the lecture rather than on taking notes. We do not stick strictly to the slide show — we go to the board frequently to present somewhat different examples, to help answer questions, and the like. We like the spontaneity and change of pace trips to the board provide, and, of course, use of the board provides needed flexibility. Also, if we feel that we have covered a topic adequately at the board, we then click quickly through one or more slides. The lecture notes we take to class consist of our own marked - up copy of the PowerPoint slides, with notes on the comments we want to say about each slide. If we want to bring up some current event, provide an additional example, or the like, we use post - it notes attached at the proper spot. The advantages of this system are (1) that we have a carefully structured lecture that is easy for us to prepare (now that we have it done) and for students to follow, and (2) that both we and the students always know exactly where we are. The students also appreciate the fact that our lectures are closely coordinated with both the text and our exams. The slides contain the essence of the solution to each part of the integrated case, but we also provide more in - depth solutions in this Instructor’s Manual . It is not essential, but you might find it useful to read through the detailed solution. Also, we put a copy of the solution on reserve in the library for interested students, but most find that they do not need it. Finally, we remind students again, at the start of the lecture on Chapter 2, that they should bring a printout of the PowerPoint slides to class ; otherwise , they will find it difficult to take notes . DAYS ON CHAPTER: 2 OF 5 6 DAYS (50 - minute periods)

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    Chapter 2 : Financial Markets and Institutions Answers and Solutions 9 Answers to End - of - Chapter Questions 2 - 1 The prices of goods and services must cover their costs. Costs include labor, materials, and capital. Capital costs to a borrower include a return to the saver who supplied the capital, plus a mark - up (called a “spread”) for the financial intermediary that brings the saver and the borrower together. The more efficient the financial system, the lower the costs of intermediation, the lower the costs to the borrower, and, hence, the lower the prices of goods and services to consumers. 2 - 2 In a well - functioning economy, capital will flow efficiently from those who supply capital to those who demand it. This transfer of capital can take place in three different ways: 1 . Direct transfers of money and securities occur when a business sells its stocks or bonds directly to savers, without going through any type of financial institution. The business delivers its securities to savers, who , in turn , give the firm the money it needs. 2 . Transfers may also go through an investment bank that underwrites the issue. An underwriter serves as a middleman and facilitates the issuance of securities. The company sells its stocks or bonds to the investment bank, which then sells these same securities to savers. The businesses’ securities and the savers’ money merely “pass through” the investment bank. 3 . Transfers can also be made through a financial intermediary. H ere the intermediary obtains funds from savers in exchange for its own securities. The intermediary uses this money to buy and hold businesses’ securities , while the savers hold the intermediary’s securities . Intermediaries literally create new forms of capital. The existence of intermediaries greatly increases the efficiency of money and capital markets. 2 - 3 A primary market is the market in which corporations raise capital by issuing new securities. An initial public offering (IPO) is a stock issue in which privately held firms go public. Therefore, an IPO would be an example of a primary market transaction. 2 - 4 A money market transaction occurs in the financial market in which funds are borrowed or loaned for short periods (less than on e year). A capital market transaction occurs in the financial market in which stocks and intermediate — or long - term debt (one year or longer) — are issued. a. A U.S. Treasury bill is an example of a money market security . b. Long - term corporate bonds are examples of capital market securities . c. Common stocks are examples of capital market securities . d. Preferred stocks are examples of capital market securities . e. Dealer commercial paper is an example of a money market security . 2 - 5 I f people lost faith in the safety of financial institutions, i t would be difficult for firms to raise capital. Thus, capital investment would slow down, unemployment would rise, the output of goods and services would fall, and, in general, our standard of living would decline.

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    10 Answers and Solutions Chapter 2 : Financial Markets and Institutions 2 - 6 Financial markets have experienced many changes during the last two decades. Technological advances in computers and telecommunications, along with the globalization of banking and commerce, have led to deregulation, which has increased competition throughout the world. As a result, there are more efficient, internationally linked market s , which are far more complex than what existed a few years ago. While these developments have been largely positive, they have also created problems for policy makers. With these concerns in mind, Congress and regulators have moved to reregulate parts of the financial sector following the recent financial crisis. Globalization has exposed the need for greater cooperation among regulators at the international level. Factors that complicate coordination include (1) the differ ent structures in nations’ ba nking and securities industries; (2) the trend toward financial services conglomerates, which obscures developments in various market segments; and (3) the reluctance of individual countries to give up control over their national monetary policies. Still, r egulators are unanimous about the need to close the gaps in the supervision of worldwide markets. Another important trend in recent years has been the increased use of derivatives. The market for derivatives has grown faster than any other market in recent years, providing investors with new opportunities but also exposing them to new risk s . Derivatives can be used either to reduce risks or to speculate. Derivatives should allow companies to better manage risk but i t’s not clear whether recent innovations have “increased or decreased the inherent stability of the financial system.” 2 - 7 The physical location exchanges are tangible entities. Each of the larger ones occupies its own building, allows a limited number of people to trade on its floor , and has an elected governing body. A dealer market include s all facilities that are needed to conduct security transactions not conducted on the physical location exchanges. The dealer market system consists of (1) the relatively few dealers who hold inventories of these securities and who are said to “make a market” in these securities; (2) the thousands of brokers who act as agents in bringing the dealers together with investors; and (3) the computers, terminals, and electronic networks that provide a communication link between dealers and brokers. 2 - 8 The two leading stock markets today are the New York Stock Exchange (NYSE) and the Nasdaq stock market. The NYSE is a physical location exchange, while the Nasdaq is an electronic dealer - based market. 2 - 9 There is an “efficiency continuum,” with the market for some companies’ stocks being highly efficient and the market for other stocks being highly inefficient. The key factor is the size of the company — the larger the firm, the more analysts tend to follow it and thus the faster new information is likely to be reflected in the stock’s price. Also, different companies communicate better with analysts and investors; and the better the communications, the more efficient the market for the stock. Highly Inefficient Highly Efficient Small companies not followed by many analysts. Not much contact with investors. Large companies followed by many analysts. Good communications with investors.

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    Chapter 2 : Financial Markets and Institutions Answers and Solutions 11 2 - 1 0 a. False; derivatives can be used either to reduce risks or to speculate. b. True; hedge funds have large minimum investments and are marketed to institutions and individuals with high net worths. Hedge funds take on risks that are considerably higher than that of an average individual stock or mutual fund. c. False; hedge funds are largely unregulated because hedge funds target sophisticated investors. d. True; the NYSE is a physical location exchange with a tangible physical location that conducts auction markets in designated securities. e. False; a larger bid - ask spread means the dealer will realize a higher profit.

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    12 Integrated Case Chapter 2 : Financial Markets and Institutions Integrated Case 2 - 1 Smyth Barry & Company Financial Markets and Institutions Assume that you recently graduated with a degree in finance and have just reported to work as an investment adviser at the b rokerage firm of S myth B arry & C o. Your first assignment is to explain the nature of the U . S . financial markets to M ichelle V arga, a professional tennis player who recently came to the U nited S tates from M exico . Varga is a highly ranked tennis player who expects to invest substa ntial amounts of money through S myth B arry. She is very bright ; therefore, she would like to understand in general terms what will happen to her money. Your boss has developed the following questions that you must use to explain the U . S . financial system to V arga. A. What are the three primary ways in which capital is transferr ed between savers and borrowers? Describe each one. Answer: [ Show S2 - 1 through S2 - 4 here. ] Transfers of capital can be made (1) by direct transfer of money and securities, (2) through an investment bank, or (3) through a financial intermediary. In a direct transfer , a business sells its stocks or bonds directly to investors (savers), without going through any type of institution. The business borrower receives dollars from the savers, and the savers receive securities (bonds or stock) in return. If the transfer is made through an investment bank , the investment bank serves as a middleman. The business sells its securities to the investment bank, which in turn sells them to the

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    Chapter 2 : Financial Markets and Institutions Integrated Case 13 savers. Although the securities are sold twice, the two sales constitute one complete transaction in the primary market. If the transfer is made through a financial intermediary , savers invest funds with the intermediary, which then issues its own securities in exchange. Banks are one type of intermediary, receiving dollars from many small savers and then lending these dollars to borrowers to purchase homes, automobiles, vacations, and so on, and also to businesses and government units. The savers receive a certificate of deposit or some other instrument in exchange for the funds deposited with the bank. Mutual funds, insurance companies, and pension funds are other types of intermediaries. B . What is a market? Differentiate between the following types of markets: physical asset markets versus financial asset markets, spot markets versus futures markets, money markets versus capital markets, primary markets versus s econdary markets, and public markets versus p rivate markets. Answer: [ S how S 2 - 5 and S 2 - 6 here. ] A market is a venue where assets are bought and sold. There are many different types of financial markets, each one dealing with a different type of financial asset, serving a different set of customers, or operating in a different part of the country. Financial markets differ from physical asset markets in that real, or tangible, assets such as machinery, real estate, and agricultural products are traded in the physical asset markets, but financial securities representing claims on assets are traded in the financial markets. Spot markets are markets in which assets are bought or sold for “on - the - spot” delivery, while futures markets are markets in which participants agree today to buy or sell an asset at some future date.

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