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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Basics of Derivatives

Which of the following statements about the difference between forwards and futures is correct?

Futures are standardised exchange-traded contracts guaranteed by a clearing corporation and marked to market daily, while forwards are customised over-the-counter agreements between two parties and carry counterparty default risk. The other statements reverse these features.

  1. AFutures are standardised and traded on exchanges with a clearing corporation guaranteeing settlement, whereas forwards are customised OTC contractsCorrect
  2. BForwards are settled daily through mark to market whereas futures are settled only at maturity
  3. CFutures carry higher counterparty default risk than forwards
  4. DForward contracts are always traded on a stock exchange

Explanation

Futures have standard lot sizes and expiries, trade on exchanges and are guaranteed by the clearing corporation with daily MTM. Forwards are bilateral OTC contracts with counterparty risk, so the other statements reverse the facts.

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