Certified Supply Chain Professional (CSCP) Practice Exam

In what way are futures contracts characterized?

1. They are customized agreements.

2. They are standardized agreements offered by exchanges.

3. They are only for commodities, not currencies.

4. They allow for unlimited negotiation.

The correct answer is: They are standardized agreements offered by exchanges.

Futures contracts are characterized as standardized agreements offered by exchanges primarily due to their structure and regulation. Unlike forward contracts, which can be customized between two parties, futures are created with specific terms regarding quantity, quality, delivery time, and pricing that are consistent across contracts for a particular commodity or financial instrument. This standardization allows futures to be traded on exchanges, providing liquidity and the ability to easily enter or exit positions. The existence of an exchange also means that futures contracts are subject to regulation, which further ensures their integrity and reliability as financial instruments. Additionally, the standardized nature of futures contracts facilitates the clearinghouse process, which mitigates counterparty risk, as the clearinghouse guarantees the performance of the contract. This is a crucial aspect that allows for the organized trading environment seen in futures markets, contrasting with more flexible but risky trading methods like forwards.