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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 an exchange-traded futures contract?

A forward contract is a customised OTC agreement with counterparty default risk, whereas a futures contract is standardised, exchange-traded and guaranteed by the clearing corporation, which acts as the counterparty to both buyer and seller.

  1. AA forward contract is standardised, while a futures contract is customised
  2. BA forward contract is traded over the counter and carries counterparty default risk, while a futures contract is guaranteed by the clearing corporationCorrect
  3. CA forward contract is marked to market daily, while a futures contract is settled only at maturity
  4. DA forward contract requires margins from both parties, while a futures contract requires none

Explanation

Forwards are bilateral OTC agreements customised by the parties, so each bears the risk that the other defaults. Futures are standardised, and the clearing corporation becomes the counterparty to every trade, removing that risk. The option that reverses standardisation is wrong, and so are those that swap daily MTM and margins between the two.

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