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Basic Question 1 of 11
A forward contract is ______.
B. the right, but not the obligation, to sell an asset for a specified price on or before a specified date in the future
C. a legally binding agreement to purchase/sell an asset for a specified price on a specified date
D. an agreement to exchange cash flows within the coming year
E. an agreement to sell an asset for a specified price on a specified date with gains and losses recognized daily
A. the right, but not the obligation, to purchase an asset for a specified price by a specified date in the future
B. the right, but not the obligation, to sell an asset for a specified price on or before a specified date in the future
C. a legally binding agreement to purchase/sell an asset for a specified price on a specified date
D. an agreement to exchange cash flows within the coming year
E. an agreement to sell an asset for a specified price on a specified date with gains and losses recognized daily
User Contributed Comments 11
| User | Comment |
|---|---|
| anish | Could somebody elaborate on the words "legally binding" since forwards are not standardized. |
| valeris | Legally binding = you have to do it. |
| bobert | I think the question means more of how it is legally binding if it is not put through a clearing company or regulated. To that I do not know either. I would imagine there is a legally binding contract however. |
| Bibhu | I feel "specified date" should be changed to "specified future date" |
| bobert | By definition, a contract is an agreement enforceable by law. So therefore, it is legally binding. They may not be standardized, but if it was not a contract, the party who ends up with a loss would never have to pay as it would not be legally binding. |
| magicchip | @ anish: forward contract participants assume each others credit risk. |
| peteypete | @ Bibhu: Why? You can't trade pasts, you trade futures! Common sense... |
| brahma | Even these are not regulated by any exchange but they comply with something ISDA regulations ( International swaps and derivatives associations which specifies rules and regulations |
| johntan1979 | A is the definition of a call option |
| To-be-CFA | A: Call Option B: Put Option C: Forward Contract D: Swaps, maybe. E. Futures, since the settlement is daily. |
| ishan4442 | It is legally binding, that's why if you fail to do it you are a default where as in options you will not be a default as you are not obliged to do so. Hope that answers :-) |
I used your notes and passed ... highly recommended!
Lauren
Learning Outcome Statements
define forward contracts, futures contracts, swaps, options (calls and puts), and credit derivatives and compare their basic characteristics
CFA® 2024 Level I Curriculum, Volume 5, Module 2.