Which hedging instrument is standardized and traded on exchanges, typically with daily mark-to-market?

• A. Forwards
• B. Swaps
• C. Options
• D. Futures

Answer: (D)

Futures contracts are standardized and traded on exchanges, with daily mark-to-market. The standardization means contract terms—size, expiration, settlement—are fixed and identical for all participants, which drives liquidity and price transparency. Because they trade on a central exchange, gains and losses are settled every trading day in cash through margin accounts, reducing credit risk and allowing hedgers to adjust positions as prices move. Forwards and swaps are typically private OTC agreements and aren’t daily marked to market in the same routine way, and options, while sometimes exchange-traded, don’t hinge on daily cash settlements as a defining feature. So the instrument that fits the description best is the futures contract.