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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives

Which of the following is true of a futures contract compared with a forward contract?

A futures contract is guaranteed by the clearing corporation, which becomes the counterparty to each side, so counterparty risk is largely eliminated. Forwards are customised, privately negotiated over-the-counter contracts without such a guarantee, whereas futures are standardised, margined and marked to market daily.

  1. AIt is customised and traded over the counter
  2. BIt carries no counterparty risk because the clearing corporation guarantees settlementCorrect
  3. CIt is settled only at maturity with no margins
  4. DIt has terms negotiated privately between two parties

Explanation

Exchange-traded futures are standardised, and the clearing corporation becomes counterparty to both sides, which largely removes counterparty default risk. Customisation, OTC trading, and privately negotiated terms describe forwards. Futures are marked to market daily with margins, not only settled at maturity.

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