CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
Compared with a forward contract, a futures contract most likely:
A futures contract is marked to market daily and guaranteed by a clearinghouse. These features distinguish it from a forward, which is privately negotiated and customized and carries counterparty risk. Futures are standardized and exchange-traded, and many positions are closed out before expiration rather than delivered.
- Ais settled only at expiration by physical delivery.
- Bis marked to market daily and guaranteed by a clearinghouse.Correct
- Cis customized privately between two parties with no regulation.
Explanation
Futures are standardized exchange-traded contracts that are marked to market daily, and a clearinghouse guarantees performance, which greatly reduces counterparty credit risk. Forwards are the privately negotiated, customized contracts. Futures are often closed out before expiration, so physical delivery is not the only outcome.
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