NISM Certifications · NISM-Series-VIII: Equity Derivatives · Basics of Derivatives
Which of the following is a key feature that distinguishes exchange-traded futures from forward contracts?
Exchange-traded futures have standardised terms and are guaranteed by the clearing corporation, which eliminates counterparty risk. Forwards are customised, privately negotiated and carry counterparty risk, with no daily mark-to-market. Futures also require margins and are marked to market daily.
- AStandardised terms with clearing corporation guaranteeing settlementCorrect
- BCustomised contract size and expiry negotiated privately
- CAbsence of any margin requirement
- DSettlement only at the end with no daily mark-to-market
Explanation
Exchange-traded futures have standardised lot sizes and expiry dates, and the clearing corporation acts as counterparty, removing counterparty risk. Customisation, no margin and no daily MTM are characteristics of forwards, not futures.
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