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Question

Identify the incorrect statement from the below:

1.Future contracts are tailor made contract.

2.Future contracts are subject to M2M settlements

3.There is more counterparty risk associated with forwards as opposed to futures.

4.Forward and futures contracts involve the agreement between two parties to buy and sell an asset at a specified price by a certain date.

5.Forward contracts have a better liquidity as compared to futures

6.Initial margin is required to enter a future contract.

A 1 & 6 Correct Answer Incorrect Answer
B 3 & 4 Correct Answer Incorrect Answer
C 3 & 5 Correct Answer Incorrect Answer
D 1 & 5 Correct Answer Incorrect Answer
E 2 & 6 Correct Answer Incorrect Answer

Solution

The forward contract is a custom-made or tailor-made contract, whereas a future contract is standardized in quantity, quality, and delivery date. Futures contracts have higher liquidity compared to forward contracts. This is because futures contracts are traded on organized exchanges, which provide a centralized marketplace where buyers and sellers can easily find counterparties to trade with.

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