- 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 carries an obligation to perform the terms of a contract. This is not like ______.
B. an option, because a service is performed, but like a cash transaction because it is completed today
C. an option, because the buyer has the choice to exercise, but similar to a cash transaction in that a service is performed
D. a hedging transaction, because a commitment has been undertaken with the forward contract
A. a cash transaction, because a service is carried out, but like on option because it is a deferred choice
B. an option, because a service is performed, but like a cash transaction because it is completed today
C. an option, because the buyer has the choice to exercise, but similar to a cash transaction in that a service is performed
D. a hedging transaction, because a commitment has been undertaken with the forward contract
Correct Answer: C
User Contributed Comments 6
| User | Comment |
|---|---|
| jainrajeshv | Anybody can explain this |
| alzaids | A forward contract carries an obligation to perform the terms of a contract. While the option is the right, but not the obligation, to excersize. So a forward is not like an option in that you are bound by an agreement to fulfil. |
| fmhp | Thanks for the summary alzaids. |
| To-be-CFA | Alzaids got it, bang on! |
| ankurwa10 | I think alzaids is right but the wording of answers is horrible. I understand what option C wants to say, but it gives the impression that forward contract is unlike an option "because it gives the buyer the choice" instead of meaning that it is in fact the option that gives the buyer the 'choice'. but what does service is performed mean? the wording is silly again |
| ankurwa10 | Also, on a conceptual level, if you analyse option D, forward contract can and are used for hedging as well, right? For example, hedging against price rise. (futures) of course i make a commitment to buy say USD at a certain quote at a later date. How does forward become exclusive from a hedging transaction. please explain? |