A major problem with a currency forward contract is that one party always has an incentive to default when the actual spot rate diverges from the contract price.

Question

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In a currency forward contract, one party has agreed to buy or sell a certain amount of currency at a specified future date and at a fixed exchange rate. However, if the actual spot rate at the time of the contract's expiration differs from the initial contract price, one party could be at a disadvantage and may be tempted to default on the contract. This is a major risk associated with currency forward contracts.

A Major Problem with a Currency Forward Contract Is That