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Default risk. Otc

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Default risk. Otc

  • This topic has 3 replies, 2 voices, and was last updated 5 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • March 4, 2020 at 3:01 pm #564152
    nikaido
    Member
    • Topics: 41
    • Replies: 89
    • ☆☆

    Hi Mr, Moffat.

    Want to confirm my understanding on forwards default risk and a tad bit confused on default risk on fra.

    I’ll go ahead with forwards first.

    We have to make the payment to the bank to satisfy the forward contract. In case we can’t come up with the payment. That’s the default risk. Am I correct?

    Now moving on to fra.

    I don’t know why it is saying counterparty risk. I mean how can the bank default?

    And similarly we have to come up with interest payment on the rate fixed? Is that the default risk resting with us. Rather than bank what I wrote above.

    March 4, 2020 at 3:38 pm #564173
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    The default risk is the risk that either of the parties to the deal might not fulfil their obligation.

    Obviously there is the risk that the company using a forward rate or an FRA might not be able to pay the required amount. However there is also the risk that the other party might not be able to do what is required. Although OTC arrangement would most likely be with a bank, it does not have to be a bank (and even if it is with a bank then although banks are not so likely to collapse it certainly can (and has) happened 🙂 )

    March 4, 2020 at 7:01 pm #564241
    nikaido
    Member
    • Topics: 41
    • Replies: 89
    • ☆☆

    Thank you so much Mr Moffat

    March 5, 2020 at 7:57 am #564318
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    You are welcome 🙂

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  • The topic ‘Default risk. Otc’ is closed to new replies.

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