- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 2. Forward Commitment and Contingent Claim Features and Instruments
- Subject 1. Forward Commitments
CFA Practice Question
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
Correct Answer: C
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 :-) |