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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?

A futures contract trades on an exchange, is standardised, and its settlement is guaranteed by the clearing corporation, while a forward contract is a customised private over-the-counter agreement that carries counterparty default risk and is usually settled only at maturity.

  1. AA forward contract is standardised while a futures contract is customised
  2. BA futures contract is traded on an exchange with a clearing corporation guaranteeing settlement, whereas a forward contract is a private over-the-counter agreementCorrect
  3. CA forward contract is marked to market daily while a futures contract is settled only at maturity
  4. DA futures contract carries higher counterparty risk than a forward contract

Explanation

Futures are standardised, exchange-traded and guaranteed by the clearing corporation, with daily MTM. Forwards are customised OTC contracts with counterparty risk and settlement at maturity. The other options reverse these features.

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