Short Forward - Why

CFA Level II
#1

One of the derivatives CFAI topic exam questions indicate that :

Parisi is incorrect about the risk between mark-to-market dates. Kwon has entered into a short forward contract. If the price of the contract rises higher than its price at inception between dates when the contract is marked to the market, it is Kwon’s counterparty that would be exposed to credit risk, not Kwon. Kwon would be exposed to credit risk only if the contract price falls to less than its price at inception.

I don’t understand why if you’re short a forward and the price of the contract rises, then you would not be exposed. Aren’t you short the forward?

#2

If you are short a contract, you expect prices to go down to make money. If they go up then you lose and the burden is on the counterparty to come collect money from you… wink

#3

You are at a loss hence you are not exposed to the credit risk

#4

Ahhh, this is TRICKYYYY. I get it now.

Exposure to credit risk means the inability of the other counter party to pay. Since you are at a LOSS, then you’re not worried about the other party not paying…Thanks

#5

FTFY

Whether it’s through inability or mere unwillingness, it’s the possibility of their failure to pay that keeps you up at night.