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

Which feature distinguishes a standardised futures contract traded on a stock exchange from a forward contract?

A futures contract is guaranteed by the clearing corporation and is marked to market every day, unlike a forward contract. Forwards are customised over-the-counter agreements carrying bilateral default risk and settling only at maturity, while futures are standardised and exchange traded.

  1. AContract terms are customised by the two parties
  2. BCounterparty default risk is borne entirely by each party
  3. CContracts are guaranteed by the clearing corporation and are marked to market dailyCorrect
  4. DSettlement happens only at maturity with no interim cash flows

Explanation

Exchange-traded futures have standardised terms, and the clearing corporation becomes the counterparty through novation, with daily MTM settlement. Forwards are customised OTC contracts with bilateral default risk and usually settle only at maturity, so the other options describe forwards.

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