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

Which of the following is a feature that distinguishes a futures contract from a forward contract?

A futures contract is standardised and traded on an exchange, with the clearing corporation guaranteeing performance. Forwards are customised OTC contracts with counterparty risk and no daily settlement, so the exchange-traded standardised guaranteed feature is what distinguishes futures.

  1. ACustomised terms agreed privately between two parties
  2. BStandardised contract traded on an exchange with a clearing corporation guaranteeing performanceCorrect
  3. CSettlement only on the maturity date with no daily cash flows
  4. DHigher counterparty default risk borne by each party

Explanation

Futures are standardised exchange-traded contracts where the clearing corporation becomes the counterparty to both sides, removing bilateral default risk. Customisation, no interim cash flows and high counterparty risk are features of OTC forwards.

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