FRM Part I · FRM Exam Part I · Futures Markets
Compared with a bilateral over-the-counter forward, which feature of a cleared futures contract most directly limits the buildup of credit exposure over time?
Daily settlement through the margin account limits credit exposure. Gains and losses are paid each day, so the potential loss from a default is roughly one day's price change, whereas an uncollateralized forward can accumulate exposure until maturity.
- ADaily settlement of gains and losses through the margin accountCorrect
- BCustomization of delivery dates to suit each party
- CAbsence of any margin requirement for high-credit traders
- DSettlement of all gains and losses only at maturity
Explanation
Daily marking to market transfers gains and losses each day, so exposure to a counterparty is at most about one day's price move. A bilateral forward without collateral can accumulate large unrealized gains until maturity.
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