Question
Question 9 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) 4 pts
Answer
4.3
(235 Votes)
Kelvin
Elite · Tutor for 8 years
Answer
(1) and (3)
Explanation
## Step 1: Understand and analyse each statement -(1) 'Forward contracts are binding' - This statement is correct. Forward contracts are indeed binding because once they are established, both parties are obligated to fulfill their parts of the agreement as per the stated terms. This means that regardless of changes in market conditions, both parties must meet at the specified contract price at the predetermined future date.(2) 'Forward contracts are flexible and can be renegotiated or cancelled at any time before the date of settlement' - This statement is incorrect. Once a forward contract is established, it cannot be modified or canceled unless both parties agree. Therefore, it is not known for being particularly flexible. (3) 'Forward contracts are prone to counterparty risks' - This statement is correct. Forward contracts entail counterparty risk as there's a chance that one party may default, that is, they fail to fulfill their obligations as mentioned in the contract. Hence, the party who is supposed to receive the agreed-upon asset or currency bears the risk without any security or collateral, which is a kind of counterparty risks.