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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Basics of Derivatives

Which of the following is a feature that distinguishes exchange-traded futures from forward contracts?

Exchange-traded futures are standardised contracts whose performance is guaranteed by a clearing corporation, which reduces counterparty risk through margins and daily settlement. Forwards, by contrast, are customised, traded over the counter and carry higher default risk.

  1. AContract terms are customised between the two parties
  2. BContracts are standardised and counterparty risk is reduced through a clearing corporationCorrect
  3. CSettlement happens only on the maturity date with no margins
  4. DThey are traded over the counter without regulation

Explanation

Exchange-traded futures have standardised terms and are guaranteed by a clearing corporation, with margins and daily MTM. The other options describe forward contracts.

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