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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives

In a futures contract on a stock index, which feature distinguishes it from a forward contract on the same index?

A futures contract is standardised and traded on a recognised exchange, with the clearing corporation guaranteeing settlement. A forward contract is a customised private agreement between two parties and carries counterparty risk. Index futures are cash settled and require margins.

  1. AIt is standardised and traded on a recognised exchange with a clearing corporation guaranteeing settlementCorrect
  2. BIt is always settled by physical delivery of all constituent shares
  3. CIt is customised privately between two parties on terms they negotiate
  4. DIt carries no margin requirement from either party

Explanation

Futures are standardised contracts traded on exchanges, and the clearing corporation acts as counterparty to both sides, removing counterparty risk. Forwards are customised over-the-counter contracts. Index futures in India are cash settled, and margins are required, so the other options are wrong.

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