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

Which statement best describes a key difference between commodity futures and commodity forwards?

Futures are standardized exchange-traded contracts that are marked to market daily through a clearinghouse, whereas forwards are customized over-the-counter agreements normally settled only at maturity and carrying bilateral counterparty risk.

  1. AFutures are exchange-traded, standardized and marked to market daily, while forwards are customized OTC contracts typically settled at maturityCorrect
  2. BForwards are marked to market daily, while futures settle only at maturity
  3. CFutures carry no counterparty risk to the exchange member under any circumstances, while forwards are always cash settled
  4. DForwards are standardized contracts traded on exchanges, while futures are bilateral and customized

Explanation

Futures are standardized, exchange-traded, margined and marked to market daily, with the clearinghouse reducing credit risk. Forwards are bilateral, customizable and usually settled at maturity, leaving counterparty risk. The other options reverse or overstate these features.

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