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

Which statement about the difference between forward and futures contracts is correct?

Futures are marked to market daily, whereas forwards are typically settled only at maturity. Futures are standardised exchange-traded contracts backed by a clearing corporation, while forwards are customised OTC agreements carrying counterparty default risk.

  1. AFutures are customised and traded over the counter
  2. BForwards are standardised and guaranteed by a clearing corporation
  3. CFutures are marked to market daily, while forwards are typically settled only at maturityCorrect
  4. DForwards have no counterparty risk

Explanation

Futures are standardised, exchange-traded, guaranteed by the clearing corporation and marked to market daily. Forwards are customised OTC contracts with counterparty risk and usually settle at maturity.

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