CFA Practice Question

CFA Practice Question

Which of the following is (are) (a) difference(s) between futures and forwards?

I. Forwards trade on both organized exchanges and OTC markets while futures trade only on futures exchanges.
II. Futures can only be traded in multiples of a standardized contract amount while forwards can trade at any notional amount.
III. Forwards can be exercised at any time over the life of the contract while futures are settled only at the end of each day.
A. I and III
B. II only
C. II and III
Explanation: Both forwards and futures are binding contracts that allow you to buy or sell an underlying commodity at a pre-determined price. One of the differences between the two is that forwards are traded over-the-counter while futures are traded on organized exchanges. Hence, forwards can be tailor-made to suit the counterparties and can be in any notional amount, while futures, being standardized contracts, can only be traded in integral multiples of the contract amount. Both forwards and futures are settled only at maturity, though the "marking-to-market" feature of futures contracts causes a daily cash flow over the life of the contract.

User Contributed Comments 1

User Comment
steved333 Forwards cannot be exercised, but they can be canceled out.
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