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

Which of the following best describes a key difference between a forward contract and a futures contract?

A futures contract is standardised, traded on an exchange and guaranteed by a clearing corporation, while a forward contract is a customised bilateral agreement traded over the counter. This is why forwards carry greater counterparty risk and futures are marked to market daily.

  1. AA forward contract is standardised and traded on an exchange, whereas a futures contract is customised
  2. BA futures contract is standardised and cleared through a clearing corporation, whereas a forward contract is customised and traded over the counterCorrect
  3. CA forward contract is marked to market daily, whereas a futures contract is settled only on expiry
  4. DA futures contract carries counterparty default risk borne by the other party, whereas a forward contract does not

Explanation

Futures are standardised exchange-traded contracts guaranteed by a clearing corporation, while forwards are bilateral, customised OTC contracts. Daily MTM applies to futures, not forwards, so option 3 is reversed. Counterparty risk is higher in forwards, so option 4 is reversed.

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