A potential disadvantage of forward contracts versus futures contracts is:
A)The extra liquidity required to cover the potential outﬂows that occur prior to delivery
And caused by marking to market.
B)The incentive for a particular party to default.
C)That the buyers and sellers don't know each other and never meet.
D)That the delivery instrument doesn't exist to cover the default risk.
E)Both A and C.

Question

Quizplus · Accepted Answer

Forward contracts have a higher risk of default (counterparty risk) because they are private agreements without a centralized clearinghouse, increasing the incentive for a party to default if it benefits them financially.

A Potential Disadvantage of Forward Contracts Versus Futures Contracts Is