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ACCA Applied Skills · Financial Management · The nature and role of financial markets and institutions

Which statement about exchange-traded currency futures compared with over-the-counter forward contracts is correct?

Exchange-traded currency futures are standardised in size and settlement date and require margin, so the hedge usually cannot match the exposure exactly and basis risk remains. Tailor-made amounts and dates are a feature of over-the-counter forward contracts, not futures.

  1. AFutures are tailored to the exact amount and date required, so there is no basis risk
  2. BFutures are standardised and require margin, so a hedge may not match the exposure exactlyCorrect
  3. CFutures eliminate counterparty risk entirely because there are no margin payments
  4. DFutures can only be used by banks and not by corporate treasurers

Explanation

Futures have standard contract sizes and settlement dates and are marked to market with margin, so the hedge is usually imperfect and basis risk remains. Option A describes forwards. Option C is wrong because margins are used, and the clearing house reduces counterparty risk rather than removing the need for margin. Option D is false.

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