CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
A fund holds a long position in an exchange-traded futures contract and a long position in an uncleared OTC forward on the same asset. The price of the asset falls sharply. Which statement most accurately compares the two positions?
The futures position has losses settled daily through the margin account, while an uncleared forward usually settles only at maturity, leaving the gaining party with growing credit exposure to the counterparty. The other statements reverse this or wrongly treat both as settled daily.
- AThe forward loss is settled daily, while the futures loss is deferred until contract expiration.
- BThe futures position faces daily settlement of losses through the margin account, while the forward typically has no loss settlement before maturity and carries accumulating credit exposure.Correct
- CBoth positions are settled daily, so neither carries counterparty credit risk.
Explanation
Futures are marked to market daily, so the fund's loss is paid via variation margin and may trigger a margin call. An uncleared forward generally settles at maturity, so the party with the gain bears accumulating credit exposure to the counterparty. The first option reverses the two, and the third wrongly assumes both are settled daily.
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