Which statement about forward contracts is typically true?

Which statement about forward contracts is typically true?

• A. They are customized and settled over-the-counter
• B. They are standardized and exchange-traded
• C. They require daily settlement and margin
• D. They are options

Answer: (A)

Forward contracts are private agreements that lock in a price for a future transaction and are typically customized and traded over the counter. Because they’re negotiated directly between two parties, the terms—such as quantity, strike price, delivery date, and settlement method—can be tailored to fit their specific needs, rather than being standardized for a broad market. Settlement occurs at a future date, and there’s no daily mark-to-market or margin requirement built into the contract, which is a feature of exchange-traded futures. Forward contracts also bind both sides to perform, unlike options, which give a right but not an obligation. That combination of customization and over-the-counter handling is what makes this description the best fit.

Forward contracts are private agreements that lock in a price for a future transaction and are typically customized and traded over the counter. Because they’re negotiated directly between two parties, the terms—such as quantity, strike price, delivery date, and settlement method—can be tailored to fit their specific needs, rather than being standardized for a broad market. Settlement occurs at a future date, and there’s no daily mark-to-market or margin requirement built into the contract, which is a feature of exchange-traded futures. Forward contracts also bind both sides to perform, unlike options, which give a right but not an obligation. That combination of customization and over-the-counter handling is what makes this description the best fit.