Which of the following statements regarding daily cash settlement before contract maturity is TRUE?

A

The correct answer is A. A futures contract requires daily cash settlement, and a forward contract does not require daily cash settlement.

Let's break down each answer choice to understand why Option A is correct:

A. A futures contract requires daily cash settlement, and a forward contract does not require daily cash settlement.

In a futures contract, daily cash settlement, also known as marking to market, occurs. This means that at the end of each trading day, the gains or losses on the futures contract are settled in cash. The purpose of daily cash settlement is to ensure that both parties to the contract are protected from potential losses and to maintain the integrity of the contract.

On the other hand, a forward contract is an agreement between two parties to buy or sell an asset at a specified price on a future date. Unlike futures contracts, forward contracts do not involve daily cash settlement. The settlement of a forward contract occurs only at the maturity date, when the parties exchange the asset and the agreed-upon cash amount.

B. Neither a futures contract nor a forward contract requires cash settlement before contract maturity.

This statement is incorrect because, as explained earlier, futures contracts require daily cash settlement, which means there is cash settlement before contract maturity. Therefore, Option B is not the correct answer.

C. A forward contract requires cash settlement, and a futures contract does not require cash settlement.

This statement is incorrect because forward contracts do not require daily cash settlement. As mentioned earlier, the settlement in a forward contract occurs only at the maturity date. Futures contracts, however, require daily cash settlement. Therefore, Option C is not the correct answer.

D. Both a futures contract and a forward contract require cash settlement before contract maturity.

This statement is incorrect because, as discussed earlier, only futures contracts require daily cash settlement before contract maturity. Forward contracts, on the other hand, do not involve daily cash settlement. Therefore, Option D is not the correct answer.

To summarize, the correct answer is Option A: A futures contract requires daily cash settlement, and a forward contract does not require daily cash settlement.