Suppose that two counterparties, A and B, enter a three-month forward contract, whereby A sells 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 1.7662?
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 sells 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 1.7662?
A) counterparty A
B) counterparty B
C) both counterparty A and counterparty B
D) neither counterparty

Quizplus · Accepted Answer

If the spot rate three months hence is exactly the same as the forward rate at which the contract was entered (AUD/USD 1.7662), neither party has an incentive to default because the terms of the contract match the prevailing market conditions at the time of settlement.

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