FRM Part I · FRM Exam Part I · Exchanges and OTC Markets
Which feature most clearly distinguishes a typical exchange-traded futures contract from a bilateral OTC forward?
Standardized terms with the clearing house acting as counterparty to both sides distinguish exchange-traded futures from OTC forwards. Forwards are customized, typically not settled daily, and carry direct credit exposure to the other party.
- AStandardized terms with the clearing house as counterparty to both sidesCorrect
- BCustomized delivery dates agreed between the two parties
- CNo daily settlement of gains and losses
- DDirect exposure to the credit risk of the other party
Explanation
Exchange-traded futures have standardized terms, and the clearing house interposes itself as counterparty to each side, with daily margining. Customized dates, no daily settlement and bilateral credit exposure are characteristics of OTC forwards.
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