CFA Practice Question

There are 221 practice questions for this study session.

CFA Practice Question

Consider a forward contract with a gold producer in which the bank pays the spot price of gold and receives a fixed price. Suppose the price of gold were to decrease. That would worsen the credit quality of the gold producer, since its revenues would decrease, making its business less profitable and viable. It would also increase the value of the forward contract to the bank, since the bank is paying the spot price; therefore, the bank's exposure would increase. The risk the bank faces is often referred to as the ______.

A. credit risk
B. counterparty risk
C. wrong-way risk
Correct Answer: C

Wrong-way risk occurs when exposure to a counterparty is adversely correlated with the credit quality of that counterparty.

User Contributed Comments 0

You need to log in first to add your comment.