Why is the default risk much more serious for forward contracts than for futures contracts?
A)Because forward contracts are nonstandard contracts.
B)Forward contracts are entered into bilaterally by the negotiating parties.
C)For forwards, all cash flows are required to be paid at one time on contract maturity.
D)Forwards are essentially OTC arrangements with no external guarantees in case of default.
E)All of the options.

Question

Quizplus · Accepted Answer

Forward contracts have a higher default risk because they are nonstandard, bilateral agreements with all cash flows occurring at maturity and no external guarantees, making them more vulnerable to counterparty default compared to futures contracts, which are standardized and traded on exchanges with clearinghouses that mitigate default risk.

Why Is the Default Risk Much More Serious for Forward