CFA Level I · CFA Level I Exam · Forward Commitment and Contingent Claim Features and Instruments
Which feature of a futures contract most likely reduces counterparty credit risk relative to a forward contract?
A clearinghouse that requires margin and settles daily most likely reduces credit risk. It stands between buyer and seller and collects losses each day, so defaults cannot build up. Standardization improves liquidity, and over-the-counter trading is typical of forwards with higher credit risk.
- AStandardized contract size
- BA clearinghouse that requires margin and settles dailyCorrect
- CTrading that occurs in over-the-counter markets
Explanation
The clearinghouse becomes the counterparty to both sides, and margin deposits with daily settlement limit accumulated losses. Standardization aids liquidity rather than credit protection. Over-the-counter trading is a forward feature that raises credit risk.
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