Practice Quiz

FRM Financial Risk Manager Practice Test

Category - Contract

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A forward contract is an agreement between two parties to buy or sell an asset at a pre-agreed future point in time at a pre-agreed price. What of the following statements is true?
  1. A futures contract is more unpredictable than a forward contract.
  2. A futures contract is standardized while each forward contract is unique.
  3. A futures contract is a forward contract that is traded on an exchange.
  4. A futures contract almost has no risk of default, while a forward contract has some risk of default involved.
Explanation
These statements are all correct.

Key Takeaway: A forward contract can be used to control and hedge risk, for example currency exposure risk (e.g. forward contracts on USD or EUR) or commodity prices (e.g. forward contracts on oil).
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