Economics · Financial Derivatives
A regulator is analyzing the core characteristics of a financial product offered to a bank's corporate client. The product is a customized contract between the bank and the client, is not traded on a formal exchange, is tailored to the client's exact needs (e.g., specific maturity of 11 months), and the performance of the contract is directly linked to the price movement of an underlying asset. There is an inherent risk that one party may fail to honor the obligation. Which combination of key features most accurately describes this financial product's nature and regulatory framework distinction?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Features: Linear Payoff, Callable/Puttable, and is regulated by SEBI under the Securities Contracts (Regulation) Act, 1956. Distinction: This product is a Swap.
- 2Features: Non-Deliverable Contract, Mark-to-Market, and requires an Initial Margin. Distinction: This product is a Stock Option.
- 3Features: Over-The-Counter (OTC), Customized, and has Counterparty Risk. Distinction: This product is a Forward Contract.✓
- 4Features: Exchange-Traded, Standardized, and has No Counterparty Risk. Distinction: This product is a Futures Contract.
Correct answer
Features: Over-The-Counter (OTC), Customized, and has Counterparty Risk. Distinction: This product is a Forward Contract.
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