Two parties agree to a forward contract to deliver the S&P 500 Index at a price of $375,000 in 2 months time. When the forward contract expires, the price of the S&P 500 Index is $350,000 but the long party is unable to pay the cash settlement. The short party is most likely obligated to: A. default on the forward contract. B. do nothing until the long makes payment. C. accept delivery of S&P 500 stocks from the long. D. deliver the portfolio of S&P 500 stocks to the long. A?
B?
i dont know C also a possibility?
I am officially freaking out, so I am not sure of my answers at this point
seen it somewhere - and i answered C at the time. Where is this question from?
mock
A or B… Forward Contract: One party agrees (obligated) to sell, the other to buy, for a forward price agreed in advance. @ expiration s&p price 500 index @ 350,000 cash settlement or physical settlement short: agrees to sell the s&p 500 index @ 375,000 in 2 months long: agrees to buy the s&p 500 index @ 375,000 in 2 months a) maybe…shouldn’t the long be the one defaulting tho? c) Incorrect, short is delivering index to long d)Incorrect, long never paid
A if you unable to fullfill your olbligation you default on the contract
“A”
The long owes the short $25k, so it can’t be A. The short can’t default if he/she doesn’t owe anything. You definitely wouldn’t actually hand over a portfolio of 500 stocks either, so it can’t be C or D (when investing in equity forwards, you settle in cash). By process of elimination, the answer must be B, right? The feedback sheet is completely unclear about this. Maybe we’ll see it again on Saturday.
The long party is the party unable to meet the obligation, not the short. It’s not A. The long owes the short $25,000… The answer is B!
Answer is B…if you are short on this contract you should receive $25,000. Because forwards trade OTC, there is no clearing house, and thus, you should wait for your counterparty to pay you.