What is the difference between a futures contract and a forward contract?

The correct choice highlights that futures contracts are standardized and traded on an exchange. This standardization refers to specific contract terms such as the quantity and quality of the underlying asset, which are predetermined. This standardization allows for greater liquidity since contracts can be easily bought and sold in a centralized market, where prices are influenced by supply and demand dynamics.

Additionally, trading on exchanges implies a regulated environment that offers transparency and ensures a certain level of creditworthiness among the parties involved, with clearinghouses acting as intermediaries. This contrasts with forward contracts, which are typically customized agreements created between two parties over-the-counter, lacking standard terms and often involving higher counterparty risk.

Forward contracts may vary in terms of pricing and conditions based on the specifics agreed upon by the parties involved and are not subject to the same regulatory oversights as futures contracts. These characteristics make futures contracts distinct from forwards in how they are structured and traded.