Question

The major difference between valuing futures versus forward contracts stems from the fact that future contracts...

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.

Homework Answers

Answer #1

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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