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

Which of the following is a key difference between a forward contract and a futures contract on the same underlying?

A futures contract has standardised terms and is guaranteed by the clearing corporation through novation, whereas a forward contract is a customised over-the-counter agreement that carries counterparty default risk. Daily mark-to-market applies to futures, not typical forwards.

  1. AA forward contract is traded on a recognised exchange, while a futures contract is traded over the counter
  2. BA futures contract has standardised terms and is guaranteed by a clearing corporation, while a forward contract is customised and carries counterparty riskCorrect
  3. CA forward contract is marked to market daily, while a futures contract is settled only on the maturity date
  4. DA futures contract can be written only on commodities, while a forward contract can be written only on equity

Explanation

Futures are standardised exchange-traded contracts whose performance is guaranteed by the clearing corporation, and they are marked to market daily. Forwards are customised OTC contracts with counterparty default risk. Option C reverses the daily MTM feature of futures.

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