The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates ________ risk.
A) market
B) credit
C) interest rate
D) basis

Question

Quizplus · Accepted Answer

Credit risk refers to the possibility that one party in a transaction may not fulfill their obligations. In the case of futures contracts, the exchange serves as the counterparty to both the buyer and seller, ensuring that both parties will honor their obligations. This eliminates credit risk for both parties. Market risk (A) refers to the possibility of losses due to unfavorable market movements, interest rate risk (C) refers to the possibility of losses due to changes in interest rates, and basis risk (D) refers to the possibility of losses due to changes in the relationship between the cash and futures markets. None of these risks are eliminated by the exchange acting as the counterparty.

The Fact That the Exchange Is the Counterparty to Every