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FRM Part I · FRM Exam Part I · Commodity Forwards and Futures

Which statement about commodity futures contracts versus commodity forward contracts is correct?

Futures are standardized, exchange-traded contracts that are marked to market daily, with a clearinghouse and margin reducing counterparty risk. Forwards are customized over-the-counter agreements that typically settle only at maturity and carry bilateral credit risk. The statement attributing these futures features to forwards is wrong.

  1. AFutures are customized and settled only at maturity, while forwards are marked to market daily
  2. BFutures are standardized, exchange-traded, and marked to market daily with a clearinghouse reducing counterparty riskCorrect
  3. CForwards trade on exchanges and are guaranteed by a clearinghouse
  4. DFutures carry greater counterparty credit risk than forwards because there is no margin

Explanation

Futures are standardized exchange-traded contracts with daily settlement and margining, and a clearinghouse stands between parties, reducing counterparty risk. Forwards are customized OTC agreements usually settled at maturity, so the first option swaps the features.

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