Explanation:
All three features that Mehmet Emre has identified are indeed accurate characteristics of futures exchanges.
In futures exchanges, traders do not have to worry about the creditworthiness of the counterparty. This is because the exchange's clearinghouse acts as the counterparty to all trades, thereby eliminating counterparty credit risk through the process of novation.
Futures contracts traded on exchanges are more standardized than similar forward contracts traded over-the-counter (OTC). Standardization includes contract size, expiration dates, and underlying asset specifications, which allows for easier trading and clearing.
Participants in futures exchanges are required to deposit an initial margin (also known as initial performance bond) with the clearinghouse of the exchange. This margin serves as a good-faith deposit to ensure that traders can meet their obligations and helps protect the clearinghouse against default risk. The margin is also subject to daily mark-to-market settlements.
Q.587 Mehmet Emre, an FRM part 1 candidate, is preparing for his upcoming exam. From his understanding of futures exchanges, he has concluded the following:
I. In futures exchanges, traders do not have to worry about the creditworthiness of the counterparty
II. In futures exchanges, the trades are more standardized than they would be for similar forwards contracts
III. In futures exchanges, participants have to deposit an initial margin with the clearinghouse of the exchange
Which of these features of futures exchanges are accurate?
A
Feature II only.
B
Feature III only.
C
Features I and II.
D
Features I, II, and III.
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