FRM Part I · FRM Exam Part I · Introduction to Derivatives
Which of the following best describes the role of the futures exchange clearing house in a futures contract?
The clearing house acts as the buyer to every seller and the seller to every buyer. This removes bilateral counterparty credit risk, since each trader faces the clearing house, which is protected by margin requirements and daily settlement of gains and losses.
- AIt becomes the buyer to every seller and the seller to every buyer, removing counterparty credit risk between tradersCorrect
- BIt sets the futures price each day based on the spot price
- CIt guarantees that all traders will profit from hedging
- DIt requires physical delivery on every contract at expiry
Explanation
The clearing house interposes itself between the two original parties, so each trades against it and does not face the other's default. It does not set prices, guarantee profits, or force delivery.
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