The main difference between forward and futures contracts is that:

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BlackTom AI · Accepted Answer

Here is a breakdown of each option for the question: 'The main difference between forward and futures contracts is that:'

Option a: 'Both require delivery of the underlying asset at expiration' This is not accurate as a general statement. Forwards and futures can be settled by delivery in some cases, but many positions are settled in cash or offset before expiration. The key distinction is not solely about delivery versus cash settlement, but the trading venue and daily settlement process.

Option b: 'Futures are exchange-traded and marked-to-market daily, whereas forwards are OTC agreements without daily settlement' This describes the canonical difference: futures contracts are standardized and traded on exchanges with daily mark-to-market, which reduces credit risk and ensures daily settlement based on price movements. Forwards are private, over-the-counter (OTC) agreements with custom terms and no daily settlement, leading to higher counterparty risk.

Option c: 'Forwards are limited to agricultural commodities only' This is incorrect. Forwards can be written on a wide range of assets, including financial instruments, commodities, and currencies. There is no inherent limitation to agricultural products.

Option d: 'Futures expose parties to greater counterparty risk than forwards' This is reversed. One of the main advantages of futures is reduced counterparty risk due to exchange clearinghouses and daily settlement. Forwards, being OTC, typically carry higher counterparty credit risk.

Option e: 'Futures allow no customization whereas forwards are more rigid in size and date' This is inaccurate in the opposite sense. Futures are highly standardized with fixed contract sizes and standard delivery months, whereas forwards are customizable in terms of size, maturity, and other terms to fit the counterparties' needs.

In summary, option b correctly captures the fundamental distinction: futures are standardized, exchange-traded, and daily marked-to-market, while forwards are private OTC contracts without daily settlement. The other options misstate key characteristics related to delivery, asset scope, counterparty risk, and the degree of customization.

The main difference between forward and futures contracts is that:Single choice

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The main difference between forward and futures contracts is that:Single choice

Similar Questions

We are able to sell or go short futures and forwards, even when we don't own them, because they are derivatives. This means a contract is created each time a buyer and seller make a new transaction.

From a financial standpoint, futures are virtually identical to forwards

Part 1Financial instruments with returns tied to previously issued securities are​ called:Part 2 A. financial derivatives B. reversible bonds C. hedge securities D. convertible bonds

Which market involves the trading of derivative securities?

Which of the following is a hedging instrument? _____

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The spot market is where securities are sold for cash and delivered immediately, whereas forward markets (or derivative markets) the delivery date is different from the negotiation date.

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Part 1Financial instruments with returns tied to previously issued securities are called:Part 2 A. financial derivatives B. reversible bonds C. hedge securities D. convertible bonds