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

In an exchange-traded equity index futures contract, which mechanism is used to collect daily gains and losses from the parties so that credit risk is limited?

Mark-to-market settlement is used. Futures positions are revalued daily at the settlement price, and profits or losses are paid or collected through the clearing corporation every day, which prevents unrealised losses from accumulating and limits counterparty credit risk.

  1. AMark-to-market settlementCorrect
  2. BPhysical delivery of shares
  3. CAnnual rollover fee
  4. DCircuit filter adjustment

Explanation

Futures positions are revalued every day at the settlement price and the gains or losses are collected or paid through the clearing corporation. This limits the build-up of credit risk. Physical delivery of shares is not the daily mechanism, and circuit filters only limit price movement.

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