CFA Level II ExamDerivativesEasy
Which of the following statements most accurately describes a key difference between a forward contract and a futures contract?
- AFutures contracts are highly customizable, while forward contracts are standardized.
- BForward contracts are marked to market daily, while futures contracts are not.
- CForward contracts are typically settled at expiration, while futures contracts are marked to market daily.
- DFutures contracts are traded over-the-counter (OTC), while forward contracts are traded on organized exchanges.
Show answer & explanationAnswer & explanation
Correct answer: C. Forward contracts are typically settled at expiration, while futures contracts are marked to market daily.
Forward contracts are private agreements typically settled with a single payment at expiration. Futures contracts, on the other hand, are exchange-traded and feature daily marking to market, where gains and losses are settled each day.
Why the other options are wrong
- A. Incorrect. Forward contracts are highly customizable; futures contracts are standardized.
- B. Incorrect. Futures contracts are marked to market daily, not forward contracts.
- D. Incorrect. Futures contracts are exchange-traded; forward contracts are OTC.
Forward vs. Futures Differences
Key distinctions between forward and futures contracts, primarily related to trading venue, standardization, and settlement.
- Forwards: OTC, customized, private, settled at expiration.
- Futures: Exchange-traded, standardized, public, marked to market daily.
- Both are agreements to buy/sell an asset at a future date for a predetermined price.
Memory trick: Forward's Private, Future's Public.