Which of the following statements best explains why forwards are considered riskier than futures for participants?​

Solution

Key risk difference between a forward and future is the counterparty risk.​ Forwards are OTC contracts with no daily mark-to-market or clearing house guarantee, leading to default risk.​ ·        Unlike futures, which are traded on regulated exchanges and backed by a clearinghouse that guarantees performance, forwards are private bilateral agreements. If one party defaults, the other has no exchange guarantee to fall back on. ·        Forwards are typically settled only at maturity, allowing potential losses to grow unchecked until the end of the contract, which increases the incentive and impact of a default. Futures are "marked-to-market" daily, meaning gains and losses are settled every day to prevent a massive accumulation of debt.   Note - While C & D are true but describe structure, not risk. E is often true but is a consequence and secondary risk, not the core reason.​