Counterparty Risk in a Futures Contract Is Lower Than in a Forward

question 21

Multiple Choice

Counterparty risk in a futures contract is lower than in a forward contract because

• A)The participants in the futures market are better funded.
• B)The futures contract is marked-to-market on a daily basis.
• C)The futures exchange bears the counterparty risk.
• D)The forward market does not charge commissions that may be used to offset the risk of counterparty failure.

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Definitions:

Return On Investment

A measure used to evaluate the efficiency or profitability of an investment, calculated by dividing the profit gained from an investment by the cost of the investment.

Operating Income

The profit earned from a firm's core business operations, excluding deductions of interest and taxes.

Investment Turnover

A measure of a company's efficiency in using its investments to generate sales, calculated as sales divided by the average value of investments.

Profit Margin

The percentage of revenue that remains as profit after all expenses have been subtracted from sales.