i have another question Two parties agree to a forward contract to deliver the S&P index at a price of $375,00 in 2months 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 forward contract B) do nothing until long makes payment C) accept delivery of S&P stocks from the long D) deliver the portolio of S&P 500 stocks to the long i know the answer is not C & D cause they cant deliver the index what do you think the answer is i thought the answer is B
My guess would be A. Contracts specify the time, and once that time has passed I don’t think anyone can do anything about it. Even though the long defaults the short can do nothing so the contract is in default. another way of looking at it is these contracts are a zero-sum game -> what one party loses the other gains, so if one is in default, so will the other? just my guess. I’d still pick A if this was on the exam.
The long party can’t pay so the short party defaults? Huh? A is silly. In fact, the short defaults the long who must make payment. If he can’t, then he needs to declare bankruptcy and let a judge sort it out. C & D are clearly out because this is a cash settled contract (I guess that is implied by “pay the cash settlement” and alsmot all S&P derivatives are cash-settled). Best answer is B but the “nothing” there is objectionable.
HOw does the short default the long?
Well, in forward contract, the party can default right? So, I thought ‘A’ is a possible answer.
Does it make sense that the person that is owed money “defaults”? I don’t that A is the right answer.
Chicago_Bull Wrote: ------------------------------------------------------- > HOw does the short default the long? Essentially you call them up and say “Where’s my money?” “I don’t have it” “Yeah, well what are you going to do about it?” “Look, I don’t have it” “OK, I’m defaulting you. Have a nice life” Then you call legal who goes through the procedure laid out in the ISDA document. I’m sure that ISDA has detailed descriptions of the ugliness on their website.
This has got to be B. It’s the only one that makes sense. If somebody doesn’t pay up, you wouldn’t be obligated to deliver until they did. A - How would you default if somebody didn’t pay you? C - Long is not the one delivering. D - Again, you haven’t been paid, so why would you be “obligated” to deliver. If this is true…I’m in the wrong business as there is a pretty good profit to be made by getting stocks for nothing in the forward market.
hoffmag2 Wrote: ------------------------------------------------------- > D - Again, you haven’t been paid, so why would you > be “obligated” to deliver. If this is true…I’m > in the wrong business as there is a pretty good > profit to be made by getting stocks for nothing in > the forward market. Sorry. You are going to have to keep working for a living.
Yep… .defaulting works both ways. Technically as if you had not entered into the contract. As forwards are not-settled through clearing house, there is always a default risk involved. A
ov25 can you cite a source? Where did you get that from?
ov25 Wrote: ------------------------------------------------------- > Yep… .defaulting works both ways. Technically as > if you had not entered into the contract. As > forwards are not-settled through clearing house, > there is always a default risk involved. > > A silly
I think it is pretty straight forward. when a forward is initiated it is faced with defualt risk-the begatively impacted side might not pay. This is the case. B should be the answer. “A” describes what the long just did. My 2 cents guys