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CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features

Compared with futures traded on an exchange with a clearinghouse, forward contracts traded over the counter without central clearing most likely:

Uncleared over-the-counter forwards carry greater counterparty credit risk because the two parties face each other directly, with no clearinghouse guarantee. Daily mark-to-market and standardized terms are features of exchange-traded futures, whereas forwards are typically customized and settled at maturity.

  1. Arequire daily mark-to-market settlement of gains and losses
  2. Bcarry greater counterparty credit risk because the parties face each other directlyCorrect
  3. Care standardized in size and maturity to promote liquidity

Explanation

Uncleared forwards are bilateral and customized, so each party bears the risk that the other defaults. Daily settlement and standardization are features of exchange-traded futures, not of uncleared forwards.

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