CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses
Compared with using exchange-traded futures, an issuer that hedges a specific exposure with an over-the-counter forward contract most likely benefits from:
The issuer most likely benefits from customization of contract size and maturity. Over-the-counter forwards can be matched to the exact exposure, whereas futures are standardized. Lower credit risk and daily mark-to-market settlement are features of exchange-traded, cleared futures instead.
- Alower counterparty credit risk
- Bcustomization of size and maturityCorrect
- Cdaily mark-to-market settlement
Explanation
OTC forwards can be tailored to the exact amount and date of the exposure. They carry higher counterparty credit risk and typically lack daily settlement, which are features of exchange-traded futures with clearing houses.
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