Which of the following derivative contract features does not reduce counterparty risk?
A)Flexible forward contracts
B)Standardized exchange-listed contracts
C)Requirements to post margin
D)Requirement to trade via a clearinghouse

Question

Quizplus · Accepted Answer

Flexible forward contracts do not reduce counterparty risk as they are privately negotiated between two parties and there are no standardized terms or centralized clearinghouse involved. The terms of the contract, including collateral or margin requirements, are subject to negotiation between the parties, which may not provide the same level of protection as standardized or exchange-listed contracts. Standardized exchange-listed contracts and requirements to post margin or collateral do reduce counterparty risk, as they provide a standardized set of terms and a third-party to manage the trades and ensure obligations are met. The requirement to trade via a clearinghouse further enhances counterparty risk reduction, as the clearinghouse acts as a central counterparty and takes on the counterparty risk of both parties to the trade.

Which of the Following Derivative Contract Features Does Not Reduce