CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
A party that has entered a long forward contract on a currency is most likely exposed to credit risk when the forward contract has:
The long is exposed to credit risk when the forward has a positive value to it. In that case the counterparty owes the long a payment and might default. When the value is negative the long is the one who owes, and at initiation the value is zero.
- Aa negative value to the long position.
- Ba positive value to the long position.Correct
- Ca value of zero at initiation.
Explanation
Credit risk is the risk that the counterparty fails to pay what it owes. This matters to the party holding a positive-value position, since the counterparty owes it money. A negative value means the long owes, and at initiation the value is zero.
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