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FRM Part I · FRM Exam Part I · Pricing Financial Forwards and Futures

Which statement best distinguishes futures contracts from forward contracts?

Futures are standardized exchange-traded contracts that are marked to market daily and backed by a clearing house through margin, while forwards are customized bilateral OTC contracts usually settled only at maturity and exposed to counterparty credit risk.

  1. AFutures are marked to market daily and settled through a clearing house with margin, whereas forwards are typically settled at maturity and are bilateralCorrect
  2. BFutures are customized and traded over the counter, whereas forwards are standardized and exchange traded
  3. CForwards require daily settlement of gains and losses, whereas futures settle only at maturity
  4. DFutures carry greater counterparty credit risk because there is no margin requirement

Explanation

Futures are standardized, exchange-traded, margined and marked to market daily, with a clearing house guaranteeing performance. Forwards are private, customized OTC agreements, usually settled at maturity, with bilateral credit risk. The other options reverse these features.

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