NISM Certifications · NISM-Series-VIII: Equity Derivatives · Basics of Derivatives
Which of the following is a key difference between a forward contract and an exchange-traded futures contract?
Forwards are customised OTC contracts carrying counterparty default risk, while futures are standardised exchange-traded contracts whose performance is guaranteed by the clearing corporation and which are marked to market daily.
- AA forward is customised and carries counterparty default risk, whereas a futures contract is standardised and guaranteed by the clearing corporationCorrect
- BA forward is marked to market daily, whereas a futures contract is settled only at maturity
- CA forward is always traded on a recognised stock exchange, whereas futures are traded over the counter
- DA forward has standardised lot sizes, whereas futures terms are negotiated privately
Explanation
Forwards are OTC, tailor-made and bear counterparty risk. Futures are standardised, exchange-traded, marked to market daily, and the clearing corporation guarantees settlement. The other options reverse these features.
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