CFA Practice Question

CFA Practice Question

A futures contract suffers from all of the following risks to certain extent, EXCEPT

I. market risk.
II. default risk.
III. liquidity risk.
IV. rollover risk.
A. I and II.
B. III and IV.
C. II only.
Explanation: A futures contract is traded on an organized exchange and the clearinghouse takes the opposite side of each contract, essentially eliminating counterparty risk.

User Contributed Comments 9

User Comment
mtcfa I thought liquidity risk would be nonexistent as well because of the clearinghouse. I guess not.
danlan The answer means future contract suffers from liquidity risk.
Mago II and III should be the answer, a futures contract would be liquid bcos the futures exchange is the 2ndary market...
alki there is liquidity risk to a certain degree, no default risk at all but there is still a little liquidity risk.....the liq risk in futures is lot smaller then the liq. risk in the swap mrk...
kevinf12 What if clearinghouse goes under? Any chance of default?
dealsoutlook i thought it should be II and III as well..guess not..and no kevinf12 clearinghouse can never default
iambroke there is liquidity risk because it is not the clearing house's responsibility to ensure an orderly market. it only takes the opposing side to each contract thus eliminating the default risk
cwest020 There is a lot of liquidity risk. Try to attempt to buy a 12 month pork belly future and see if you can liquidate at an efficient market price.
GBolt93 Clearinghouse takes the opposing side of each contract, but there still needs to be a party to each side so that it nets to zero. I.e. you want to sell a future contract you still need a buyer. Clearinghouse doesn't buy it automatically.
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