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    Question

    Which of the following instrument is subject to counter

    party risk?
    A Forwards Correct Answer Incorrect Answer
    B Futures Correct Answer Incorrect Answer
    C Options Correct Answer Incorrect Answer
    D A and B Correct Answer Incorrect Answer

    Solution

    Forwards are subject to counterparty risk because they are private contracts between two parties, and there is a risk that one party may default on their obligations. In contrast, futures contracts (option B) are typically traded on organized exchanges with a clearinghouse acting as the counterparty to both parties, reducing counterparty risk. Options (option C) also involve counterparty risk, but it is generally lower compared to forwards because options are standardized and often traded on organized exchanges with similar clearing mechanisms as futures contracts.

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