Question

One of the key differences between forward contracts and futures contracts is:

(a) Forward contracts trade on the financial markets.

(b) Futures contracts can be arranged for almost any currency.

(c) Futures contracts can be “unwound” (bought or sold) prior to expiration.

(d) Forward contracts are limited to standardized delivery dates.

(e) None of the above

And explain?

Answer 1

A forward contract is mostly a private and customizable contract that is trade over the counter. On the other hand, futures contract are standardized , non customizable and is traded on an exchange like a stock exchange. Being traded in a market futures contract eliminates the couterparty risk which otherwise is present in a forward contract. In future, as it is traded prices are settled on a daily basis and is market to market. They have clearning houses that guarantee the transactions.

Answer is (c) Futures contracts can be “unwound” (bought or sold) prior to expiration