A potential disadvantage of forward contracts versus futures contracts is:
A)the extra liquidity required to cover the potential outflows that can occur prior to delivery.
B)the higher incentive for a particular party to default.
C)that the buyers and sellers don't know each other and never meet.
D)the obligatory requirements rather than the optional opportunities.
E)the increased ability to close out a position prior to expiration.

Question

Quizplus · Accepted Answer

In forward contracts, there is a higher incentive for a party to default as there is no daily mark-to-market margining system and the contract may not be as standardized as futures contracts. This increases the counterparty risk for the other party involved in the contract.

A Potential Disadvantage of Forward Contracts Versus Futures Contracts Is