Which of the following statements is true?
A)In general, default risk on OTC contracts decreases with the time to maturity of the contract and the fluctuation of underlying prices, interest rates or exchange rates.
B)In general, default risk on OTC contracts increases with the time to maturity of the contract and the fluctuation of underlying prices, interest rates or exchange rates.
C)In general, default risk on OTC contracts is independent of the time to maturity of the contract and the fluctuation of underlying prices, interest rates or exchange rates.
D)OTC contracts are generally free of default risk.

Question

Quizplus · Accepted Answer

Generally, as the time to maturity of an OTC contract increases, so does the potential for default risk. This is because the longer the time until settlement, the more opportunity there is for market conditions to change and the counterparty to be unable to meet their obligations. Similarly, the greater the fluctuation of underlying prices, interest rates or exchange rates, the higher the risk of default. Therefore, choice B is the correct answer.

Which of the Following Statements Is True