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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives

An investor holds a long position in a Nifty futures contract. In the context of the derivatives market, what is the main feature that distinguishes a futures contract from a forward contract?

A futures contract is standardised and traded on a recognised exchange, with a clearing corporation guaranteeing settlement. A forward is a customised over-the-counter agreement between two parties and carries counterparty risk, which is the key difference between the two instruments.

  1. AFutures are standardised and traded on a recognised exchange with a clearing corporation guaranteeing performanceCorrect
  2. BFutures are customised between two parties and settled privately
  3. CFutures carry no margin requirement from either party
  4. DFutures can be created only on commodities and never on indices

Explanation

Futures contracts have standardised terms (lot size, expiry) and trade on exchanges, with the clearing corporation acting as counterparty, which removes counterparty risk. Forwards are customised OTC contracts. Margins are required in futures, and index futures exist, so the other options are wrong.

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