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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives

Which statement best describes the key difference between a futures contract and a forward contract in India?

A futures contract is standardised and traded on a recognised exchange with a clearing corporation guarantee, whereas a forward contract is a customised over-the-counter agreement between two parties and therefore carries counterparty default risk.

  1. AA futures contract is standardised and traded on a recognised exchange, while a forward contract is customised and traded over the counterCorrect
  2. BA futures contract is customised between two parties, while a forward contract is traded on an exchange
  3. CA futures contract has no counterparty risk for either party in any case, while a forward contract has none
  4. DA futures contract can only be settled by physical delivery, while a forward contract is always cash settled

Explanation

Futures are standardised in lot size, expiry and terms, and trade on exchanges with a clearing corporation guaranteeing settlement. Forwards are bespoke OTC agreements carrying counterparty risk. The option stating futures are customised reverses the true position.

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