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CFA Level I · CFA Level I Exam · Pricing and Valuation of Futures Contracts

Compared with a forward contract on the same underlying, a futures contract is most likely to:

A futures contract is most likely marked to market daily, with gains and losses settled through a margin account. Forwards are customized private agreements that usually settle only at expiration, while futures are standardized, exchange-traded and backed by a clearinghouse.

  1. Abe settled only by physical delivery at expiration.
  2. Bbe marked to market daily, with gains and losses settled through a margin account.Correct
  3. Cbe customized between two parties with no clearinghouse.

Explanation

Futures are standardized, exchange-traded and guaranteed by a clearinghouse, with daily settlement of gains and losses through margin accounts. Forwards are customized over-the-counter agreements, usually settled at expiration. Option C describes a forward, and option A is wrong because many futures are cash settled or closed out before expiry.

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