The major difference between valuing futures versus forward contracts stems from the fact that future contracts are a. Relatively inflexible. b. Less risky. c. Traded on exchange. d. Marked-to-market daily. e. Backed by a clearinghouse.
Answer:b. Less risky.
Futures contracts are highly standardized whereas the terms of each forward contract can be privately negotiated. | ||||||||||
In a futures contract, the exchange clearing house itself acts as the counterparty to both parties in the | ||||||||||
contract. To further reduce credit risk, all futures positions are marked-to-market daily, with margins | ||||||||||
required to be posted and maintained by all participants at all times. All this measures ensures virtually | ||||||||||
zero counterparty risk in a futures trade. |
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