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

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

Exchange-traded futures have standardised terms and are guaranteed by a clearing corporation, which acts as counterparty to every trade. Forwards are private, customised over-the-counter agreements that carry counterparty default risk and usually have no daily margining.

  1. AStandardised contract terms with a clearing corporation guaranteeing performanceCorrect
  2. BCustomised quantity and delivery date agreed between two parties
  3. CAbsence of any margin requirement
  4. DSettlement only on the date of agreement

Explanation

Futures are standardised in lot size, expiry and underlying, and the clearing corporation becomes counterparty to both sides, removing counterparty risk. Forwards are customised OTC contracts, so the customised-terms option describes forwards, not futures.

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