Question
Which of the following statement(s) is/are true?(Select the correct answer from the options below the statements) (1) Forward contracts are binding (2) Forward contracts are flexible and can be renegotiated or cancelled at any time before the date of settlement (3) Forward contracts are prone to counterparty risks (1) only (1) and (2) (1) and (3) (1), (2) and (3)
Answer
4.7
(203 Votes)
Delilah
Advanced · Tutor for 1 years
Answer
(1) and (3)
Explanation
## Step1: Understand the statements about forward contracts.A forward contract is a contract between two parties for the purchase and sale of an asset at a specific price on a certain date in the future, distinguished by its non-standardization and over-the-counter trading. They are not traded on exchanges like futures. ## Step2: Start by examining the each statement.### Statement (1): "Forward contracts are binding" - This is true as once a forward contract is made, both parties are obligated to act upon the agreed terms, regardless of current market fluctuations.### Statement (2): "Forward contracts are flexible and can be renegotiated or cancelled at any time before the date of settlement" - This is largely untrue because although there may be possibilities for discussion between the two parties involved, they are fundamentally binding and cannot easily be cancelled or renegotiated unless both parties agree, which is relatively rare.### Statement (3): "Forward contracts are prone to counterparty risks" - This is a true statement because, in a forward contract, if either party defaults on the agreement, there may not be an institution like an exchange to ensure the terms are carried out, meaning the other party may bear losses.## Step3: Given the assessment of the individual statements above, one can deduce that statements (1) and (3) are true regarding forward contracts.