4Q- 94 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: Select exactly 1 answer(s) from the following: 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. my guess: B only reasonable choice
yes, B is right in any kind of contract, why should losing party insist on completing the contract.
Where’s this question from? I would think the answer is “A”. Let’s think: You (long) and I (short) had a contract to exchange X for Y on this date. You defaulted (i.e. you’re not paying me)… Since you defaulted, I have no obligation to you and am giving you nothing (you can call it me defaulting on you, if you’d like). Even if you come up with the money tomorrow or in a week, it’s too late. We’re done. So choice “B” doesn’t seem right, I am not going to wait for you. Choice “C” doesn’t make sense because we’d be exchanging the index for the index so there’s no value in it, and “D” is obviously not going to happen. So I think “A”.
What is the answer guys- in forward one has to bear the counterparty risk. So it is between a and b ? S
problem with forwards is that there is always default risk. I have not seen any material relating to how to deal with it. I assume that because default risk is inherint in forwards you would have to wait for payment