Question

What is the risk associated with counterparties in forward contracts due to the absence of secondary markets?

a.

Credit risk.

b.

Market risk.

c.

Liquidity risk.

d.

Interest rate risk.

Posted under IC 89 Management Accounting

Answer: (a).Credit risk. Explanation:In the absence of secondary markets, counterparties in forward contracts are locked into the contract and become subject to the risks of failure to perform by either party or the risk of subsequent price fluctuations and interest/exchange rates changes.

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Q. What is the risk associated with counterparties in forward contracts due to the absence of secondary markets?
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