Why Is the Default Risk Much More Serious for Forward

question 70

Multiple Choice

Why is the default risk much more serious for forward contracts than for futures contracts?

• A)Because forward contracts are nonstandard contracts.
• B)Forward contracts are entered into bilaterally by the negotiating parties.
• C)For forwards, all cash flows are required to be paid at one time on contract maturity.
• D)Forwards are essentially OTC arrangements with no external guarantees in case of default.
• E)All of the above.

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Definitions:

Controller

A senior financial officer in an organization responsible for overseeing accounting and financial reporting.

Contingency Plan

A strategy or plan developed to take into account unforeseen events or emergencies to mitigate their potential impact on operations.

Bankruptcy

Legal nonpayment of financial obligations.

Operations Period

The timeframe during which specific operational activities or processes are carried out.