Which of the following statements is false:

Which of the following statements is false:
A . Forward contracts are settled at the end of the contract while futures gains and losses are settled daily
B . Futures are OTC instruments with transparent pricing while forward contracts are not
C . Forward contracts, unless collateralized, carry credit risks while the exchange practically eliminates the credit risk on a futures contract.
D . Forward and futures prices differ due to differences in the timing of cash flows

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Answer: B

Explanation:

This question addresses the key differences between futures and forward contracts. Forward contracts are over the counter (OTC) instruments, while futures are exchange traded. Therefore Choice ‘b’ is not a true statement.

Futures contracts require an initial margin to be paid to the exchange, and gains and losses to be settled daily, while forward contracts generally settle only at the maturity of the contract. Therefore Choice ‘a’ is a true statement.

The exchange is the counterparty in a futures contract, and through its system of initial and variation margins guarantees the performance of the contract. Futures therefore have very little credit risk when compared to forwards. Therefore Choice ‘c’ is a true statement.

Because futures gains and losses give rise to daily cash flows, while the P&L on forward contracts is settled only at the end of the contract, the timing differences create small pricing differences between the two. Therefore Choice ‘d’ is a true statement.