CFA Practice Question

There are 206 practice questions for this study session.

CFA Practice Question

A forward contract is ______.

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 :-)
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