forward conversion with options avoids counterparty risk why

CFA Level III
#1

as titled

#2

Not sure, are the options purchased from the exchange ?

#3

Because the strategy involves both call option and put option locked at the same exercise price, effectively hedging the position. Therefore, there is no counterparty risk.

#4

This doesn’t logically follow.

Unless, of course, they’re exchange-traded options.

#5

@ Magician

Thanks. Got confused with counterparty risk and riskless position

@ OP

Maybe someone else can provide answer…

#6

I suspect that the answer is that you’re assuming exchange-traded options.

#7

The text doesnt specify exchange-traded options. As a matter of fact, it instead implicate dealers, so it is more likely to have counterparty risk, am i correct?

#8

In that case, of course.