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

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

Futures are exchange-traded contracts with standardised terms and daily mark-to-market settlement guaranteed by a clearing corporation. Forwards are customised over-the-counter agreements with counterparty risk, so the reverse statements about standardisation and guarantee are incorrect.

  1. AForwards are standardised and traded on exchanges, futures are customised
  2. BFutures are traded on exchanges with standardised terms and daily settlement through a clearing corporationCorrect
  3. CForwards carry no counterparty risk because they are guaranteed by a clearing corporation
  4. DFutures contracts can only be settled by physical delivery of the underlying

Explanation

Futures are exchange-traded, standardised and marked to market daily with the clearing corporation as guarantor. Forwards are OTC, customised and carry counterparty risk. Index futures are cash-settled, so physical delivery is not the only mode.

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