What Is the Purpose of a Credit Forward Agreement

question 36

Multiple Choice

What is the purpose of a credit forward agreement?

• A)To allow property-casualty insurers to hedge the extreme losses that occur after major catastrophes.
• B)To adjust prices on outstanding futures each day to reflect current futures market conditions.
• C)To facilitate the future exchange of an asset for cash at a price that is determined daily.
• D)To hedge a cash asset on a direct dollar-for-dollar basis with a forward or futures contract.
• E)To hedge against an increase in the default risk of a loan.

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Definitions:

Cognitive Illusions

The systematic biases and errors in human decision making.

Decision-Making System

The cognitive process resulting in the selection of a belief or course of action among several alternative possibilities.

Gambler's Fallacy

The mistaken belief that if something happens more frequently than normal during a certain period, it will happen less frequently in the future, or vice versa.

Law of Small Numbers

A cognitive bias that leads people to draw broad conclusions from small data sets.