FRM Part I · FRM Exam Part I · Futures Markets
Which feature of a futures clearinghouse most directly limits the buildup of large unrealized losses that could lead to a counterparty default?
Daily settlement through variation margin most directly limits default risk. Gains and losses are transferred in cash every day, so a party's unpaid loss cannot accumulate beyond one day's movement plus the margin buffer.
- ADaily settlement of gains and losses through variation marginCorrect
- BCollection of a one-time fee at contract initiation
- CAllowing delivery at any time during the contract month
- DSetting contract sizes in round-lot units
Explanation
Daily marking to market means losses are paid in cash each day via variation margin, so exposure is reset daily and cannot accumulate. The other features do not collect losses as they occur.
Did you get it right without looking?
One question tells you little. A timed set on Futures Markets shows your real accuracy, how long you take and where you lose marks.
More Futures Markets questions
- A company hedges a commodity purchase by buying futures. The initial futures price is 84 and the final spot price is 90. At closing, the fut…
- A speculator opens a short position in 10 gold futures contracts, each for 100 ounces, at $2,000 per ounce. Initial margin is $8,000 per con…
- A clearinghouse member's clearing account holds a long position and a short position in the same contract through different customers. The c…
- A bond trader holds a bond currently quoted at 104.20 with a conversion factor of 1.0500. The Treasury futures price is 99.00. Which stateme…
- A clearinghouse has three members, each with a 1,000 variation-margin-covered position. Member A defaults after a sharp market move, and its…
- A company hedges a commodity purchase with futures but will close the hedge before the futures contract expires. Which statement best descri…