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Reading 71: Forward Markets and Contracts - LOS a ~ Q1-4

1.The party to a forward contract that is obligated to purchase the asset is called the:

A)   short.

B)   payer.

C)   receiver.

D)   long.

2.The short in a forward contract:

A)   has the right to deliver the asset upon expiration of the contract.

B)   is obligated to deliver the asset upon expiration of the contract.

C)   has the right to deliver the asset at the contract price anytime prior to expiration of the contract.

D)   is obligated to deliver the asset anytime prior to expiration of the contract.

3.Default risk in a forward contract:

A)   only applies to the long, and is the probability that the short can not acquire the asset for delivery.

B)   only applies to the short, who must make the cash payment at settlement.

C)   is the risk to either party that the other party will not fulfill their contractual obligation.

D)   is lessened by the mark-to-market feature found in a typical forward contract.

4.Which of the following statements about forward contracts is least accurate?

A)   A forward contract can be exercised at any time.

B)   Both parties to a forward contract have potential default risk.

C)   The short promises to sell the asset.

D)   The long promises to purchase the asset.

答案和详解如下:

1.The party to a forward contract that is obligated to purchase the asset is called the:

A)   short.

B)   payer.

C)   receiver.

D)   long.

The correct answer was D)

The long in a forward contract is obligated to buy the asset (in a deliverable contract). The terms payer and receiver are used with swaps.

2.The short in a forward contract:

A)   has the right to deliver the asset upon expiration of the contract.

B)   is obligated to deliver the asset upon expiration of the contract.

C)   has the right to deliver the asset at the contract price anytime prior to expiration of the contract.

D)   is obligated to deliver the asset anytime prior to expiration of the contract.

The correct answer was B)

The short in a forward contract is obligated to deliver the asset (in a deliverable contract) on (or close to) the expiration date.

3.Default risk in a forward contract:

A)   only applies to the long, and is the probability that the short can not acquire the asset for delivery.

B)   only applies to the short, who must make the cash payment at settlement.

C)   is the risk to either party that the other party will not fulfill their contractual obligation.

D)   is lessened by the mark-to-market feature found in a typical forward contract.

The correct answer was C)

Default risk in forward contracts is the risk to either party that the other party will not perform, whether that means pay cash or deliver the asset. Mark-to-market payments as the asset price changes are a feature of futures (not forward) contracts.

4.Which of the following statements about forward contracts is least accurate?

A)   A forward contract can be exercised at any time.

B)   Both parties to a forward contract have potential default risk.

C)   The short promises to sell the asset.

D)   The long promises to purchase the asset.

The correct answer was A)

Forward contracts typically require a purchase/sale of the asset on the expiration/delivery date specified in the contract. The other statements are true.

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