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FRM Part I · FRM Exam Part I · Exchanges and OTC Markets

A corporate treasurer must hedge a EUR 7.3 million receivable due in 83 days, a size and date that match no listed futures contract. Which is the most important reason the treasurer would likely choose an OTC forward over exchange-traded futures?

The treasurer would choose an OTC forward because it can be tailored to the exact amount and date of the receivable, removing the mismatch that standardized futures would leave. The other features cited are wrong: forwards carry credit risk and lack exchange guarantees.

  1. AThe forward can be customized to the exact amount and date, eliminating basis mismatchCorrect
  2. BThe forward has no counterparty credit risk because it is privately negotiated
  3. CThe forward is marked to market daily, removing the need for cash management
  4. DThe forward is guaranteed by the exchange clearing house

Explanation

Customization lets the hedger match the exposure exactly, avoiding the residual basis and quantity mismatch of standardized futures. However, an OTC forward carries counterparty credit risk, is not usually margined daily, and has no exchange guarantee, so the other options are wrong.

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