Forward contracts are typically

Forward contracts are typically

• A. OTC and not exchange-traded
• B. Exchange-traded futures
• C. Identical to futures
• D. Cannot be used for hedging

Answer: (A)

Forward contracts are private, customized agreements to buy or sell an asset at a fixed price on a future date. Because they are negotiated directly between two parties, they are typically traded over-the-counter (OTC) rather than on an exchange, which allows terms to be tailored but also introduces counterparty risk and no central clearing. In contrast, futures are standardized and traded on exchanges with margin and daily settlement, which reduces counterparty risk. Hence, describing forwards as OTC and not exchange-traded is the correct characterization.

Forward contracts are private, customized agreements to buy or sell an asset at a fixed price on a future date. Because they are negotiated directly between two parties, they are typically traded over-the-counter (OTC) rather than on an exchange, which allows terms to be tailored but also introduces counterparty risk and no central clearing. In contrast, futures are standardized and traded on exchanges with margin and daily settlement, which reduces counterparty risk. Hence, describing forwards as OTC and not exchange-traded is the correct characterization.