CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses
An analyst states that, unlike a forward contract, a futures contract is most likely to feature:
A futures contract is most likely to feature marking to market with daily settlement of gains and losses. Forwards are privately negotiated and normally settle at maturity, leaving the parties exposed to each other's default, while futures use margin and a clearinghouse.
- Amarking to market with daily settlement of gains and losses.Correct
- Bdelivery terms negotiated privately between the two parties.
- Cexposure to default risk of the specific counterparty at maturity.
Explanation
Futures are marked to market daily and gains and losses are settled through margin accounts. Forwards are privately negotiated and typically settle only at maturity, leaving credit exposure to the counterparty.
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