Which of the following are risks that arise when you hedge by buying a forward contract in
Question:
Which of the following are risks that arise when you hedge by buying a forward contract in imperfect financial markets?
(a) Credit risk: the risk that the counterpart to a forward contract defaults.
(b) Hedging risk: the risk that you are not able to find a counterpart for your forward contract if you want to close out early.
(c) Reverse risk: the risk that results from a sudden unhedged position because the counterpart to your forward contract defaults. So if you then close out (to reverse the position) you might already have lost money, i.e. reversing may mean you lock in a loss.
(d) Spot rate risk: the risk that the spot rate has changed once you have signed a forward contract.
Step by Step Answer:
International Finance Putting Theory Into Practice
ISBN: 978-0691136677
1st edition
Authors: Piet Sercu