Distinguish between forwards and futures in one key way.

• A. Forwards are customized over-the-counter contracts with counterparty risk; futures are standardized, exchange-traded with daily settlement and less counterparty risk.
• B. Forwards are standardized, exchange-traded; futures are customized OTC
• C. Forwards and futures are identical in all respects
• D. Futures are settled at expiration only, forwards daily

Answer: (B)

The key distinction being tested is how these contracts are arranged and traded. Forwards are private, customized agreements negotiated directly between two parties and traded over the counter, which creates counterparty risk since there’s no central clearinghouse. Futures, in contrast, are standardized contracts created by an exchange and traded on that exchange, with fixed terms and daily settlement through margin accounts, which significantly reduces counterparty risk and improves liquidity. That difference—customization and OTC trading versus standardization and exchange trading with daily mark-to-market—is what makes them fundamentally different. The other statements mix up who sets the terms and how settlement works: forwards are not standardized or exchange-traded, futures are not customized OTC, they are not identical, and futures are settled daily rather than only at expiration.