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IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies

Which feature distinguishes exchange-traded futures from over-the-counter forward contracts used by companies?

Exchange-traded futures are standardised and marked to market daily through a clearing house, which uses margin to limit default risk. Over-the-counter forwards are customised and bilateral, so they carry more counterparty risk and are not normally margined daily.

  1. AFutures are standardised and typically marked to market daily through a clearing houseCorrect
  2. BFutures are customised to the exact needs of each company
  3. CForwards are normally settled daily with margin calls
  4. DFutures carry greater counterparty default risk than forwards
  5. Forwards are always traded on a recognised exchange

Explanation

Futures have standard contract sizes and dates, and a clearing house requires margin and marks positions to market daily, which reduces default risk. Forwards are customised and bilateral, so they carry more counterparty risk. The other options reverse these features.

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