Suppose that two counterparties, A and B, enter a three-month forward contract, whereby A buys USD1 million at a forward rate of AUD/USD 1.7662.
Which party is likely to default if the spot rate three months hence is 1.8000?
A) counterparty A
B) counterparty B
C) both counterparty A and counterparty B
D) neither counterparty

Question

Suppose that two counterparties, A and B, enter a three-month forward contract, whereby A buys USD1 million at a forward rate of AUD/USD 1.7662.
 Which party is likely to default if the spot rate three months hence is 1.8000?
A) counterparty A
B) counterparty B
C) both counterparty A and counterparty B
D) neither counterparty

Quizplus · Accepted Answer

Counterparty B is likely to default because the spot rate of 1.8000 is higher than the forward rate of 1.7662, meaning counterparty B would have to sell USD at a less favorable rate than the market rate, resulting in a loss.

Suppose That Two Counterparties, a and B, Enter a Three-Month