Reading 69: Forward Markets and Contracts-LOS b 习题精选 2011, contract, discuss, forward, settled

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Session 17: Derivatives
Reading 69: Forward Markets and Contracts

LOS b: Describe the procedures for settling a forward contract at expiration, and discuss how termination alternatives prior to expiration can affect credit risk.

 

 

A forward contract that must be settled by a sale of an asset by one party to the other party is termed a:

A) take-and-pay contract.

B) physicals-only contract.

C) deliverable forward contract.

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A deliverable forward contract can be settled at expiration only by actual delivery of the asset in exchange for the contract value. The other terms are made up.

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When a party to a forward contract terminates the contract prior to the original expiration date by entering into a perfectly offsetting forward contract with a second counterparty:

A) there is no future liability, but default risk remains for all parties until the original contract settlement date.

B) the party terminating the forward contract has no default risk, but both counterparties face default risk.

C) the party terminating the contract is exposed to default risk, but has no further asset price risk.

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When a forward contract is terminated by an offsetting contract with a second counterparty, there is no further asset price risk, but since there are two separate contracts with different counterparties, all parties are exposed to default risk until both contracts are settled. Since the two contracts may have different forward prices, the terminating party may have a future liability at settlement, but the amount is fixed at the time the offsetting contract is initiated. The terminating party may have ‘locked in’ a future gain or loss, depending on the difference between the forward prices of the two offsetting contracts.

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Some forward contracts are termed cash settlement contracts. This means:

A) at contract expiration, the long can buy the asset from the short or pay the difference between the market price of the asset and the contract price.

B) either the long or the short in the forward contract will make a cash payment at contract expiration and the asset is not delivered.

C) at settlement, the long purchases the asset from the short for cash.

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In a cash settlement forward contract there is a cash payment at settlement by either the long or the short depending on whether the market price of the asset is below or above the contract price at expiration. The underlying asset is not purchased or sold at settlement.

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Which of the following is NOT a method of terminating a forward contract prior to expiration?

A) Make an agreed upon payment to the counterparty.

B) Enter into an offsetting forward contract with the original counterparty.

C) Exercise a swaption.

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A swaption can be used to terminate a swap. The others are both ways to terminate a forward contract prior to expiration.

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An investor can exit a forward position prior to contract expiration by all of the following methods EXCEPT:

A) making a cash payment or accepting a cash payment by agreement with the original counterparty.

B) exercising the early delivery option.

C) entering into an offsetting contract with the original counterparty.

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There is typically no early delivery option in a forward contract. The other two methods are both usual ways of terminating a forward contract prior to the settlement date specified in the contract.