Question

Which of the following statements about forward contracts is least accurate?

Select one:

a. The long promises to purchase the assets.

b. A forward contract can be exercised at any time.

c. Both parties to a forward contract have potential default risk.

Answer 1

Answer: Option "b" is least accurate.

Forward contract- It is a derivative contract between two parties to buy or sell a particular asset at a specified price and at a specific date in future.

Long forward contract promises to purchase the asset, short forward contract promises to deliver the asset. Both parties have default risk as any one party may default in paying or delivering the asset. Forward contracts are customized contracts and traded Over the counter.

But forward contract cannot be exercised anytime. They can only be exercised at specified time in future.