Skip to content

CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features

A corporate treasurer needs to hedge a euro receipt of an unusual amount due on a specific date that does not match any standard futures expiration. The treasurer's best reason to choose an OTC forward over an exchange-traded futures contract is that the forward:

The OTC forward is best because it can be tailored to the exact amount and date of the exposure. Daily mark-to-market and clearinghouse guarantees belong to exchange-traded futures, not forwards, so they do not justify choosing the forward.

  1. Acan be tailored to the exact amount and date of the exposureCorrect
  2. Bis marked to market daily, which removes all basis risk
  3. Cis guaranteed by a clearinghouse, which removes default risk

Explanation

OTC forwards can be customized in size and maturity, giving a precise hedge. Daily marking to market and clearinghouse guarantees are features of exchange-traded futures, and neither is a feature of a forward.

Did you get it right without looking?

One question tells you little. A timed set on Derivative Instrument and Derivative Market Features shows your real accuracy, how long you take and where you lose marks.

Practise Derivative Instrument and Derivative Market FeaturesFree diagnostic mock

More Derivative Instrument and Derivative Market Features questions