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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Forwards and Futures

Which feature distinguishes a exchange-traded futures contract from a forward contract?

Exchange-traded futures are standardised contracts whose counterparty risk is managed by a clearing corporation, which guarantees settlement. Forwards, by contrast, are customised over-the-counter agreements between two parties and carry bilateral default risk.

  1. ATerms are customised between the two parties
  2. BContracts are standardised and counterparty risk is handled through a clearing corporationCorrect
  3. CSettlement happens only on the maturity date with no daily adjustment
  4. DThe contract is traded only over the counter

Explanation

Futures traded on exchanges have standardised terms (lot size, expiry) and the clearing corporation becomes counterparty to both sides through novation, removing bilateral default risk. Forwards are customised OTC contracts with no daily settlement, so the other options describe forwards.

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