Economics · Financial Markets - Derivatives
Derivative instruments such as Forward Contracts and Futures Contracts are extensively used to manage exchange rate and interest rate risks. Which of the following statements accurately highlights a fundamental operational and regulatory difference between a Currency Forward Contract entered into with an Authorized Dealer bank and a Currency Future Contract traded on an exchange?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Forward contracts are standardized in terms of lot size and expiry dates while futures contracts are fully customizable to meet the specific requirements of the client.
- 2Futures contracts involve a clearing house that acts as a counterparty to every trade to eliminate default risk, whereas forward contracts are private bilateral agreements with counterparty risk.✓
- 3Forward contracts require the payment of an initial margin and daily mark-to-market settlement, while futures contracts only involve a one-time settlement at the end of the period.
- 4Currency forward contracts are regulated by SEBI while currency futures contracts are exclusively regulated by the Reserve Bank of India.
Correct answer
Futures contracts involve a clearing house that acts as a counterparty to every trade to eliminate default risk, whereas forward contracts are private bilateral agreements with counterparty risk.
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