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

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

Exchange-traded futures are standardised contracts whose settlement is guaranteed by the clearing corporation, which acts as counterparty to both sides. Forwards, by contrast, are privately negotiated, customised over-the-counter agreements carrying counterparty default risk and no daily mark-to-market.

  1. AContract terms are negotiated privately between the two parties
  2. BStandardised terms with a clearing corporation guaranteeing settlementCorrect
  3. CSettlement takes place only through physical delivery of the asset
  4. DThere is no daily mark-to-market of positions

Explanation

Exchange-traded futures have standardised lot size, expiry and terms, and the clearing corporation becomes the counterparty to both sides through novation, removing counterparty risk. Forwards are customised OTC contracts with bilateral default risk. Private negotiation and no daily MTM describe forwards, not futures.

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