clearlycanadian

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

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

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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.

clearlycanadian

Default risk in a forward contract:

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

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

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

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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.

clearlycanadian

The short in a forward contract:

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

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

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

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